Merrill Lynch Settlement

[Lion EA]

Clients received two small checks from Merrill Lynch re a legal settlement, pricing issues I think. Maybe $45 each to H & W. Thing is, with all the typos on the ML letter/check stub, it appears these were IRAs for the H & W. So, do I ignore the settlement because it took place in an IRA (clients have not been taking distributions, are way too young for RMD, and are no long contributing to their IRA due to retirement plans at their jobs)? Or, is it considered a DISTRIBUTION from their IRAs since they received and deposited the checks personally? Do I have to dummy up a couple of Forms 1099-R for these two receipts? Checks were made out to

MLPF&S Cust FPO

John Doe Rra

FBO John Doe

address...

and similarly for his wife. Yes, they both said "Rra" which I'm guessing is IRA. They don't remember what they had at ML. They're new clients and recommended by long-time clients, so I'd like to do as much as possible for them this year and not send them looking for information that they have no more access to than I do for this class action suit. Hoping someone out there has had a similar ML check come across your desk this season.

[Lynn EA USTCP in Louisiana]

At ML, RRA refers to ROTH IRA.

Lynn Jacobs, EA

Kenner, LA

[Lion EA]

OK, so it was a settlement to the Roth IRA. Thank you for the translation. I'd sorted out all the other jargon but that. Now, if the client cashed or deposited the settlement check in their personal account, is it now a DISTRIBUTION from the Roth?

[MontanaEA]

I'd say it's reported as a distribution, since they got the money.

[kcjenkins]

And since Roth distributions are non-taxable, unless they are 'early' distributions, it's probably not taxable at all. It sounds like an adjustment to give back an overpayment, and since Roth contributions are not deductible, a refund on them should not be taxable, either. Which is probably why they got no 1099R.

[Lion EA]

That was what I went with after Lynn told me that the ML code Rra was for Roth IRA. They're very old accounts for this couple, so no problem with the time frame for opening the accounts or converting. No 1099-Rs, so I decided it was from their contributions those many years ago and not taxable. I made a note to myself. Hope I can decipher it if they receive any IRS correspondence! But it's only about $45 each, so hopefully the IRS has bigger fish to fry.

[Gail in Virginia]

Since this thread was posted, I have gotten a return in that had settlement checks from several different funds in varying amounts, not necessarily Merrill Lynch. The accompanying paperwork says they are part of a settlement from the fair funds established by the Securities and Exchange Commission in connection with the administrative proceeding referenced. Apparently, this settlement relates to mutual fund market timing activity. The clearest accompanying documentation is from Putnam, which breaks the settlement checks down into an amount for advisory fees, interest on the judgment and the share of losses due to the shareholder.

The web-site referenced by MFS for the Massachusetts INvestors Growth Stock Fund A goes into great detail about the tax treatment of the distribution, and mentions that funds in an IRA should be deposited back to the IRA or rolled over. If they are not, they could be subject to early distribution penalties. The notices I have from Bank of AMerica and Franklin are less detailed, and the web sites are less helpful, but it appears that unless the underlying instrument has been sold, these can be treated as basis adjustments rather than taxable events. But if your taxpayer is under 59 1/2 they may be subject to the early withdrawal penalty if it is an IRA investment and they do not deposit it to the IRA account or roll it over; however, the funds are excused from issuing 1099's for these amounts.

This is probably not very clear because I am still not clear in my mind about these settlements. But since it seemed so similar to the situation that Lion originally referenced, I wanted to add a post suggesting further research if you get a check for this settlement amount. The websites I reviewed were www.rust-mfssettlement.com, www.BankofAmericaFairFund.com and www.franklinfairfundsettlement.com

Just what I needed this far into tax season - more research :spaz:

[Lion EA]

Thank you, Gail, for posting the results of your research. I bookmarked the pages you provided. With the ones I had coming from Roth IRAs, I had the luxury of treating them as from contributions and not taxable. But, it seems it's a more widespread issue than I could've imagined.

[Catherine]

Thank you, Gail, for posting the results of your research. I bookmarked the pages you provided. With the ones I had coming from Roth IRAs, I had the luxury of treating them as from contributions and not taxable. But, it seems it's a more widespread issue than I could've imagined.

I've had a couple of these in the last couple of years, too. Guess I'm luckier than I realized in that the documentation has been reasonably clear (the Hartford and I forget who else; FAQ's online rather than anything sent in the mail). One sum was put into a retirement account (non-reportable), the other had a whopping $25 settlement for legal fees that ended up on Line 21. Not a retirement account, so early distribution wasn't an issue there.

Catherine

[TAXBILLY]

Ive had a few these within the past few weeks but the amounts have been small enough to not make much difference.

taxbilly

[RDennis]

I personally (not clients) have had two the last two years. My broker suggested they should be treated as a rollover to avoid taxation. They were as gailtaxed described.

Dennis