A Simple(?) IRA question

[LaVidaRoja]

Stock in a company I held in my IRA was bought out by another company. I received cash. All was in my IRA. Subsequently, a class action suit has been brought claiming that the proceeds were not what they should have been. Any settlement I receive in the class action will be paid to me personally, not into my IRA. How should this be treated? Is it a premature distribution? (subject to the 10% penalty) Is it subject to the 60-day roll-over proceedures? Is it simply "other income" (line 22, I think) to me?

I would appreciate the advice of some of the experts on this board.

No, the proceeds are not such that I will seek a PLR.

[Pantherphil]

If the stock in question was owned by your IRA Trustee/Custodian, why would not the settlement payment be made to the IRA Trustee/Custodian and held as part of your IRA account? I have had this situation arise with clients who held stock in a self directed IRA accounts which were part of securities class actions and we have always submitted our claim in the name of the IRA custodian/trustee who was the actual owner of the securities in question and the settlement check was issued in the name of the IRA custodian f/b/o client. Since the settlement check went directly to the IRA, no taxable distribution occurred.

[jcolvin2]

I have to disagree with Pantherphil, who in all fairness may not have noticed that LaVidaRoja is getting a settlement from a law suit (bolding added by me).

And I think that is the key point. The class action suit occurred outside of the aegis of your IRA and therefore any settlement you receive is made outside your IRA.

However, and I could be wrong on this, the settlement you received is a settlement and may not be subject to income taxation. If it occurred last year, did you receive a 1099 for it? If that's the case, that it is not subject to taxation, it should greatly reduce your angst.

Heck, if you can do so, you could take part or all of the settlement money and make a contribution to a Roth IRA - depending on income and contributions to other plans, please consult with your tax advisor.

I am sure the legal beagles will chime in with more and possibly better information.

I wonder why LaVidaRoja is getting the settlement, rather than his IRA. According to LVR, his IRA owned the stock. (How would the claim have been transferred from the IRA account to LVR individually?) If I recall correctly, there is fairly good law that recovery on claims with respect to stock held in an IRA are tax exempt the same way all other income on assets held in an IRA are tax exempt. It may just be a procedural issue that can be remedied in the way that Pantherphil suggests.

If the payor refuses to cooperate, you may wish to consult with your tax advisor. One possible approach would be signing over the settlement check to your IRA custodian, and then filing a Form 8275 disclosure statement with your federal tax return containing the facts and law with respect to why you did not report the amount reflected on the payor's Form 1099 issued to you.

[Nikki]

Based on personal experience, signing over a check from one IRA to another is not necessarily a great idea.

You lose the paper trail needed to rebut the IRS regarding a premature withdrawal and the like.

Instead, you should have documentation available (such as your own cancelled check payable to the new IRA) showing you actually paid the full proceeds into a qualified IRA.

[LaVidaRoja]

AHA!! NOW I understand the nuance. Self-directed IRA. I just have to be VERY careful to sign the paperwork as "LaVidaRoja/CGM IRA Custodian"

Thank you all very, very much

[snip]

Not so "simple" sometimes huh? Does anyone have the SIMPLE IRA contribution limits for 2010?

[jg]

IR-2008-118, Oct. 16, 2008, announced cost-of-living adjustments applicable to dollar limitations for pension plans and other items for tax year 2009. For details see the article at http://www.irs.gov/retirement/article/0 ... 61,00.html

So far as I know, the cost-of-living adjustments applicable to dollar limitations for pension plans for tax year 2010 have not yet been published.