IRA reimbursement

[Earl]

Client had IRA with a stock that went under class action suit and the value
of the stock was severely reduced. Three years laterclient receives a check
based on the suit. No loss was ever taken on the reduction in value since
this was an IRA.
What would be the tax result if money received was just returned to the IRA?
Due to income would client have to show this return to IRA as non-deductible
contribution?
What would be the tax result it money received was reinvested on non IRA
account keeping in mind that no deduction ever taken for the loss?

[New York Enrolled Agent]

Not sure of all the details but you might have a "restorative payment" here.

Here's an article to look at: http://kkwc.com/wp-content/uploads/2...ugust_2007.pdf

[Earl]

Seems to fit

Not sure of all the details but you might have a "restorative payment" here.

Here's an article to look at: http://kkwc.com/wp-content/uploads/2...ugust_2007.pdf

Thanks. This seems to fit the situation I had questions about.

[Roland Slugg]

The link posted by NYEA certainly does seem to apply. Before turning the payment over to the IRA, however, the client should make sure the payment is, in fact, related to the IRA's investment in that company's shares. It seems to me that the payment should have and would have been made payable to the IRA, not to the IRA's owner. If the owner also owns/owned shares in the same company, he must take care to return to the IRA only the proceeds intended for his IRA.

A question you didn't ask but is interesting to ponder is: What would be the tax result if the funds are NOT returned to the IRA? Treated as a distribution? That would seem to make the most sense. But at what value? The shares' value, if any, when the company went under, or the amount of the later payment received? If the former, the taxable distribution would be little or none, and if that is the proper treatment ... or an allowable treatment ... then it might be smart to NOT restore the settlement proceeds to the IRA. Instead keep them and report them as a capital gain.

The tax benefits of an IRA are well known, but there is one negative aspect which is not as well understood. To the extent its funds are invested in appreciating stocks and mutual funds an IRA has the effect of converting capital gains into ordinary income ... exactly the opposite of what investors want.

[Lion]

I had one of those years ago where the instructions with the check said if it had been held in an IRA to return the check to the company with a request to rewrite it to the IRA, if desired. I think I kept it personally as it was small, but don't remember the details.

[DaveO]

I got a check a few years ago from one of these. I had since moved my IRA to another company. I endorsed the check over to the new company and included a letter explaining what had happened and a copy of the settlement letter. The new company posted it as a rollover.