L1: Class actionHello, I posted a bit ago about ending my existing SEPP with Fidelity. Something else came up now also that I’m trying to figure out how to pay taxes on for 2014. 11/22/51 and the first payment from the SEPP was 2/2010
A few years ago, I had a stock, which ended up in a class action suit. It has a different ticker and all now but that shouldn’t matter. So, a few months ago I got a check for 91.16 or something like that for the payment of the suit. Of course it’s nowhere near what the losses were but that’s the way it goes. This loss was in the IRA that I have the SEPP on. So it couldn’t be claimed as a loss. It’s just a loss. It also couldn’t be a redeposit because that IRA is locked. Nothing can be put into it at this point. In fact, the check was sent from Fidelity to me. So this isn’t income per se, but it also is on money that never had taxes taken out. I put a reminder about it in my tax stuff for the end of the year, but I just am trying to figure it out now.
How does one pay taxes on that? I had to cash it as it had an expiration date. The only suggestions I found online were related to IRA’s that were already closed and they a situation like this. The advice there was to claim as “other income.” I’m within months of finishing the obligations for the SEPP and not a comfortable time for things like this. I didn’t remove it from the SEPP but it is part of that IRA.
Thanks again in advance,
JS2014-10-18 01:43, By: JS, IP: [184.108.40.206]
L2: Class actionIn situations where settlements come from lawsuits involving investments that had been in IRAs, I always have the client endorse and deposit the check by mail into their checking account, if possible, even if the check is made out to their named IRA account. Usually the banks never notice the difference, or just let it go. I report it as an IRA DISTRIBUTION, because that is what it is, with a copy of the notice that accompanies the check.
I have never had the question the reporting as an IRA DISTRIBUTION, because that is whose investment it was.
In your situation where the IRA is, or was, a SEPP, I believe this approach is also preferable because it minimizes the reporting of a contribution, which is not allowed anyway.
Only in the rare case that you are ever audited for any reason, and in the rarer case that any IRS agent would ever put 2 & 2 together, I doubt that they would ever pursue any issue that would cause a SEPP disallowance issue.
Regardless, in your situation, you are already over 59 1/2, and it is not an “early distribution”.2014-10-18 03:06, By: dlzallestaxes, IP: [220.127.116.11]
L3: Class actionThank you so much for your reply.
The check was deposited into my checking account. It was made out to me but sent to Fidelity, and forwarded to me. Like you said it is not allowed to be a contribution.
I guess I understand what you’re saying. But doesn’t saying it is an IRA distribution make me be taking more than the allowed amount for the year? The payments I get are monthly using the amortization method. I’m pretty sure I have the paperwork from the check saying “whatever class action” with my tax records for the year. I only have the one IRA.
I do understand that the tax works out the same anyhow. Either way it’s going to just get added to my income for the year. I’m pretty picky about my taxes to avoid any problems at all. My tax person was confused on this one as well, so that’s why I came here where specifically the SEPP plans are discussed.
So, I’m obviously not a tax person, but am concerned about calling it another distribution. However I do want to do what’s exactly correct also.
2014-10-18 03:23, By: JS, IP: [18.104.22.168]
L4: Class actionI understand your concern.
I doubt if Fidelity will include this in their 1099-R for distributions from your SEPP IRA, unless they actually deposited it into that account. If they did deposit it into the SEPP IRA account, there is nothing that you can do about that.
Your accountant will have to report on your 1040 whatever Fidelity reports on its 1099-R. You did not indicate, but I assume that you are talking about a 2014 transaction. You might be able to convince Fidelity to exclude that amount from their 2014 1099-R and 5498 reporting to IRS, and to report it on a separate 1099-R to which your accountant can attach the notice and explanation to your 2014 form 1040.
By yourreporting it as a separate IRA distribution on your 1040, it would minimize the possibility of IRS connecting the 2 transactions in their computer system. Usually, the only way that the IRS even looks at the 1099-R figures for the different years is if there is an audit, which is usually the result of something else on the tax return. I have never had any IRS inquiry about only the SEPP IRA distributions. As a matter of fact, if the IRS computers were programmed to compare these figures, then every SEPP that took a prorated first year or last year distribution would have been flagged by the IRS for the different figures from the full annual distribution, and I have never heard of that being done by the IRS.
2014-10-18 12:38, By: dlzallestaxes, IP: [22.214.171.124]
L5: Class actionThank you again.
Yes, the settlement was this year after dragging on for years. I don’t remember the date of the class action, but it was an SEPP at the time regardless. The check was drawn and deposited in my checking account in October of 2014. So it was not deposited into the SEPP. That part I’m happy about.
I guess I need to call Fidelity next week and see how they intend to report it.
Thank you again for your time,
2014-10-18 12:50, By: JS, IP: [126.96.36.199]
L6: Class actionActually, you should have endorsed the check over to re deposit in your IRA. This payment is considered a “restorative payment” under IRS RR 2002-45. Since then a series of IRS PLRs have established that the restorative payment concept extends to IRA accounts. These are not treated as contributions (regular or rollover), are not reported on a 1099R and not reported on a 5498 as a contribution. This is why these checks are made out to your IRA in the first place and not to you personally. Banks that cash these checks are doing so in error. For additional detail, you might google “restorative payments” and/or KKWC to pull up an article on restorative payments by Bruce Steiner.
By cashing the check, you have now created a taxable distribution, even though you still will not get a 1099R. Perhaps you can take your records to Fidelity documenting the amount of the check and proving that this was a restorative payment and maybe they will agree to accept your own check in the same amount as a non reportable transfer as if you had just endorsed the original check over. That will eliminate having to report this at all. If they insist on treating it as a rolloverwith a 5498, then youprobably would forget the re deposit and report it as other income on line 21. There are several different ways you could go with this, butendorsing the check over is by far the best because itcomplies with all IRS rulings and does not create additional risks to your SEPP.2014-10-19 00:44, By: Alan S, IP: [188.8.131.52]
L7: Class actionHi Alan, thank you so much for joining in.
Apparently I messed up already by cashing it and not asking earlier. I always figured the SEPP was totally locked out from contributions so no way it could go back in there. The scary part to me is that is was never taxed at all. There was no guidance on what to do other than cash it, like any other check.
I did look at the articles you suggested and I think I understand. Some of it is a bit over my head, but I think I get the gist of it.
I looked for a couple of hours today and couldn’t even find the explanation of what it was and what it was for. It’s not like me to throw things like that away so I’ll probably keep on looking. I also contacted the law firm of the class action hoping they could save me the trouble. I’m not sure what Fidelity would have on their records. It seems if something might touch the IRS they want to stay at arms length.
The stock loss is definitely on Fidelity’s records, and I’m sure they forwarded me the original paperwork for the class action, but I guess I don’t have a lot of faith in them helping much. Maybe though.
So, at this point I guess I have to wait to see if I either find the explanation or get a copy from the law firm. Then call Fidelity to see. But I can claim it as other income at least. As I said earlier I’m very close to fulfilling my requirements with the SEPP, 4 months away and just looking forward to being done with the restrictions.
2014-10-19 01:31, By: JS, IP: [184.108.40.206]
L8: Class actionOk, I found the explanation that came with the check.
It does have a ref. number on it that is the number of the IRA. But other than that, it was to me, at my address and it just says Fidelity IRA.
A bunch of legal stuff, and of course the taxes are your responsibility and talk to your tax advisor.
Please cash it promptly, but I’m sure if it would have been endorsed over to the IRA as suggested by Alan, it would have been the same.
The big question is really to me if this could somehow mess up the SEPP? I didn’t request any withdrawal. It was actually a loss on the stock. Not that it matters in the IRA.
I can now talk to Fidelity like Alan suggested to see if they’ll put it back in, but if not, and I just claim it as other income, is that ok? Or do I have to try to get it back in there to not mess it up? My tax bracket isn’t very high, I’m retired. Paying taxes on 90 bucks isn’t a hardship. Messing up the SEPP would be a very big hardship though.
2014-10-19 19:30, By: JS, IP: [220.127.116.11]
L9: Class actionIt would be nice if these class action attorneys would include some info about restorative payments in their cover letters when the settlement involved IRA funds. Of course, only a very small portion of these involve IRAs being used for an active SEPP.
Fidelity will almost certainly insist on issuing a 5498 if you roll the funds over because this is no longer a direct transfer after cashing the check (bad advice in the cover letter). If you want to roll it over to eliminate reporting the distribution, better to set up a separate IRA account and then the 5498 will not have the same account number as the SEPP account.
No matter what happens, at the end of the day, your SEPP will probably be intact. But the IRS may put you through a real hassle before they relent since they are generally not up to speed on 72t plans to begin with, not to mention a 72t plan with a restorative payment issue. But with all the IRS letter rulings confirming that this payment should not be considered either a regular contribution or a rollover contribution, eventually they should agree that your SEPP is intact. Keep as much documentation as you can for at least 5 years just in case.2014-10-19 21:21, By: Alan S, IP: [18.104.22.168]
L10: Class actionThanks again Alan,
I guess I’m thinking it’s a lot easier to report it as “other income?”
There should be nothing wrong about that, should there? The taxes should work out the same as being just added to my income. As I mentioned, I’m not in a tax bracket where it matters. I just want to pay taxes on it, and be done with it. To make another IRA over it sounds like a bit of overkill. Unless it would make it somehow immune to question. It doesn’t sound that way to me.
I fully intend to keep all the recommended documentation for at least 5 yrs. I printed out the suggestions on this site and that’s how I’m approaching it. The whole SEPP thing has worked out very well for me, but it’s very disconcerting right at the end to have doubts.
2014-10-19 21:33, By: JS, IP: [22.214.171.124]
L11: Class actionIt may be easier to report on line 21 (Other income), but the reporting instructions require you to attach a brief description of what the income source was. If you indicate that it was a restorative payment for IRA losses, the IRS will wonder why it is not on line 15 where it should be if the check was cashed. While this should not bust your plan, it may well result in an IRS inquiry and possibly an initial reaction that there was an additional distribution. You would then have to explain the various IRS rulings on restorative payments.
No matter what course you take now, there is some risk. The only action that would not have caused any red flags was the endorsement of the original check, since that would have been an IRA transfer and would not have required any tax reporting at all. Since that option is no longer possible, it is difficult to attempt to determine which of these lesser options is least likely to result in a hassle. IRS experience with this combination of events (SEPP with a restorative payment that was cashed) is rare enough it is not possible to generalize what the outcome should be. Again, while you might end up with a hassle of correspondence, I do think in the end the IRS will not bust your plan once they understand the interconnected issues.2014-10-20 04:04, By: Alan S, IP: [126.96.36.199]
L12: Class actionThanks again Alan. I guess we’ll just see what happens now.
JS2014-10-20 12:18, By: JS, IP: [188.8.131.52]
L12: Class actionHello again,
Well it’s tax time as everyone well knows. I have my 1099 from Fidelity regarding this and it has nothing about this check. It’s the exact same amount as has been for the almost 5 yrs. of the SEPP. I also got the other form from them about contributions and it has a couple of lines and missing most of them. From prior years I know that means I contributed nothing as it should be.
I had called them also and at least the person I got said there was no record of the check, which I sort of question, but I think they meant they just forwarded it to me. But They don’t have it recorded as a distribution anywhere.
So as dlzallestaxes said I should claim this however Fidelity reports this. But seemingly, they didn’t. Of course there could be other forms I know nothing about that they file. It did have the number of the IRA as the reference number on the cover letter.
This is confusing to me. I know we’ve gone over this before and I did have another IRA before so the distributions on the IRA line were more than just the SEPP. But I had another 1099 to validate that. In this case, if I claim it on the IRA distribution line, it’s more than the 1099 by the amount of the check.
If claimed as other income, is it “class action”, or something like that? I have confidence in my tax preparer, but the SEPP and then with this issue is is not a very common occurrence. My tax preparer is in another state and I’m trying to overnight this tomorrow or Wednesday. I have a small refund coming and, like everyone else in the country, I could use it.
Thank you all again so much, you’re very valuable resources.
2015-02-03 03:15, By: JS, IP: [184.108.40.206]
L13: Class actionNo surprise that the amount is not on your 1099R because your IRA custodian did not issue the check. It came from the class action firm, and these firms generally do not issue 1099R forms. The letter that came with the check or the check stub should have an IRA account number on it, and I gather that it is the same account numberof your current IRA that is funding the SEPP. As such there is no way to report this on your return that is not deceptive and would not raise a red flag with the IRS. Placing it on line 21 would be somewhat deceptive when it should clearly be on 15. But you might consider placing it on 21 with a complete explanation that is was a restorative payment for a class action suit on an IRA holding that should not affect your SEPP, but you cashed the check because the letter told you to rather than depositing it back to the IRA as a restorative payment. Use the term “restorative payment” two or 3 times in your explanation. Not perfect, but there is no perfect solution now.2015-02-03 05:01, By: Alan S, IP: [220.127.116.11]
L14: Class actionThanks again Alan,
What a weird situation. Almost better to not be involved in the class action at all. But that’s also not intuitive to anyone. Also, it could have taken another year to get the payment, which wouldn’t have been so much of an issue. It’s sort of in the “sweet spot” to be an issue, that’s not really an issue.
Hopefully someone else can benefit from this dialogue.
I’ll forward this entire discussion to my tax preparer, and thank you all again.
2015-02-03 05:12, By: JS, IP: [18.104.22.168]