Settlement money returned on 72T
L1: Settlement money returned on 72T
I had my monthly distributions for the year in a sweep account at Schwab. During the recession and when the markets fell a class action lawsuit was filed stating this sweep account (which earned a high degree of interest) overstated its assets/investments.
I received a settlement check from CW in the amount of $600. Does this money need to be deposited back into my 72t?
PS: I set this 72t up 5 years ago following this forum. I will be 591/2 in Feb of 2012. I was modest in my distributions and have actually retained the entire principal. Thank you for your reply – Denver
2011-07-16 16:30, By: Denver, IP: [188.8.131.52]
L2: Settlement money returned on 72T
We need more info to narrow this down:
1) Is this the Schwab Yield Plus settlement?
2) Exactly who is the check made out to? Just you? You AND your IRA?
3) What account number of yours shows on the check? Same IRA # you are using for your SEPP? Taxable account (not IRA)?
Dealing with this depends on understanding exactly what you received.
2011-07-16 20:38, By: Alan S., IP: [184.108.40.206]
L3: Settlement money returned on 72T
1. Yes, Yield Plus Settlement
2. Payable to Me, Charles Schwab Inc Cust, IRA Contributory
3. It has the 72t account number on it
2011-07-16 22:42, By: Denver, IP: [220.127.116.11]
L4: Settlement money returned on 72T
OK, it happens that the Yield Plus settlement included fund activity during some of the period after you started your 72t plan. Whileit would be possible to convince the IRS that the damages were part of your initial account
balance and therefore NOT a new contribution to the IRA, there is no guarantee that the IRS would see it that way. In addition, while Schwab would allow the proceeds to be transferred back to the IRA in a non reportable transfer (no 1099R or 5498), if the
IRS did an audit it might still be considered a contribution that could bust the plan.
I suggest talking to Schwab about this and ask them for a written confirmation that they will NOT issue a 1099R and do not consider this a distribution. If you cannot get that assurance, to protect yourself you could arrange
to take the last $600 of your regular SEPP distribution inmid to lateDecember. Then, if Schwab DOES include thesettlement proceeds in the 1099R for your SEPP account, you can roll the last $600 you took out in Dec back to the IRA as long as you complete
the rollover within 60 days. That will cancel out the settlement $600 and leave you with the correct 72t total for the year. Try to avoid other indirect rollovers for 12 months because you are only allowed one per IRA account within a 12 month period.
In addition, if you don’t get the Schwab letter, then have them open a new IRA account number and transfer the settlement check into the new account, NOT back to the SEPP IRA account. That eliminates the potential contribution
Since Schwab will probably NOT include the settlement in the 1099R amount, you would not have to do anything out of the ordinary. Your line 15a on Form 1040 will show the exact amount for your SEPP calculation.
These actions should eliminate the chance of the IRS taking the position that you contributed$600 of new money to your SEPP account as well as the risk of receiving a 1099R with $600 too much on it with no chance to do a 60
day rollover back to the IRA.
Maybe someone else has a different idea………..
2011-07-17 01:49, By: Alan S., IP: [18.104.22.168]
L5: Settlement money returned on 72T
I do have an existing IRA outside of the 72t that I can roll that in to. You make a good point, if this is reported by Schwab, I assume it will be an IRA distribution (which does have implications on reporting on the 1099R). I will reach out to them however
to let you know when I set this up they indicated that they just ‘follow instructions per the 72t owner’ and do not give advice (not surprised).
I assume that if I were to deposit it into our savings, it would be considered a distribution and incur all penalties.Sounds like the best plan for now and the easiest is to walk it into Schwab and sign it over to the IRA thatresides outside of my 72t.
2011-07-17 14:38, By: Denver, IP: [22.214.171.124]
L6: Settlement money returned on 72T
Hi Alan- hope you are enjoying this fine Sunday.
A few comments:
Since it applies to this IRA (i.e., it is for the investments in this IRA), it should be deposited to this IRA. For IRS, Schwab and tax reporting purposes, it is treated similar to earnings/interest, which means it is a nonreportable deposited and should
not be reported as a distribution on the delivering end, nor a contribution to the IRA. Make sure Schwab knows this- though I think they do, I have had experience with some custodians who were unaware of how to treat these settlements.
The official term for this payment is a Restorative Payment. See
http://www.retirementdictionary.com/definitions/restorativepayment . The link includes a supporting Revenue Ruling
2011-07-17 16:00, By: Denise Appleby, IP: [126.96.36.199]
L7: Settlement money returned on 72T
Yes, Schwab has handledthese as restorative payments as I have personally done several of them with Schwab. They just ask you to endorse the check and indicate “for deposit to IRA Account #xxxxxx”. I used a different account
number on several of them because the IRA account number shown on the restorative check had been closed. Have never received a 1099R or 5498, so he should be OK.
2011-07-18 00:22, By: Alan S., IP: [188.8.131.52]
L8: Settlement money returned on 72T
Thank you both, received confirmation today from Schwab that the money will be deposited as ‘restorative’. Denver
2011-07-21 02:43, By: Denver, IP: [184.108.40.206]