Mistakenly deposited ROTH IRA securities litigation check to checking account

[Sue52]

I mistakenly deposited ROTH IRA securities litigation check to my joint checking account. How do I correct or report this? Is it taxable now if account is more than 5 years old and I am over 70? Is there a way to have it corrected?

[Opus 17]

If this is money that was supposed to be in your Roth IRA (because some security lost money due to fraud etc, and this is the settlement for growth you would have had), then:

If you want to put the money back into the Roth, I believe you have 60 days from receiving the check.  It is not required that you endorse and forward the exact same check, you can write a check or make an electronic transfer from your bank account as long as it within 60 days.  However, I don't know the magic words to tell the IRA to accept it as something that is not a regular contribution -- I will ask for another expert. @dmertz 

If you want to keep the money, or it is after 60 days from when you got the check, then I would consider it to be equivalent to a regular withdrawal, which is non-taxable in your situation.  Don't report it on your tax return, but keep the paperwork explaining the money for 3 years in case of audit.   (**If you get a 1099-R or 1099-INT you may need to report it and then zero it out, you can post back later and ask for instructions if you get a 1099.)

[dmertz]

Facts and circumstances determine whether the deposit of some or all of these funds to the Roth IRA would be considered to be a "restorative payment."  Only compensatory amounts can be treated as restorative payments.  If deposited directly to the Roth IRA, the amount that qualifies as a restorative payment would not involve the limit on the frequency of rollovers or the 60-day rollover deadline.  (A proper restorative payment should be made payable to the Roth IRA, not the Roth IRA owner.)  It's possible that depositing into an account other than a Roth IRA the amount that would otherwise be a restorative payment effectively resulted in a Roth IRA distribution that would have to be treated as such, subject to the one-rollover-per-12-months rule and the 60-day rollover deadline, but I can't say for sure.

[Sue52]

Thank you for the response. In the worst case scenario, if I do nothing to fix the erroneous deposit, I have to report this as a Roth IRA distribution? And would it be taxable? Not sure how much it matters since it's a small amount, and I don't want it to get more complicated than it has to be. 

[DMarkM1]

No. The worst-case scenario is none of the payment was restorative and it is all taxable.  Reporting the entire deposit as a Roth distribution, which would be non-taxable in your situation, is, in fact, the "Best Case Scenario".  Hopefully you received some documentation outlining the nature of the payment. 

As Dmertz alludes to, only the "Restorative" part of the payment could be reported as a Roth distribution and be non-taxable in your situation. 

According to IRS Revenue Ruling 2002-45, to be restorative, the payment cannot exceed the amount of the loss plus any appropriate earnings adjustments. Anything over that amount, punitive payments, for example, could not be restorative.  

Any non-restorative amounts would generally be taxable income.   If you get some kind of form 1099 you will enter that form just as you received it and then as Opus17 notes "back out" of taxable income the restorative (non-taxable) part as a negative "Other Reportable Income" entry (Steps below).    

Conversely, if you do not get a form 1099 but your paperwork shows some or all of the payment is non-restorative, you would add that taxable income as "Other Reportable Income" on your return (Steps below). 

Finally, if the payment is all restorative and you did not get any forms 1099 for the amount, then don't enter it on your return at all and then as Opus17 states, keep the paperwork to support your action should it ever come up.  

1. Select "Wages and Income" from the menu
2. Start "Miscellaneous Income"
3. Start "Other Reportable Income"
4. Yes
5. Add
6. Description - Identify what you are doing.  

• If "Backing out" a form 1099 amount, then for example "Restorative Roth settlement (Form 1099-XXX) and then enter a negative amount in the amount box. 
• If no form 1099 received, then "Roth Settlement" and enter the positive (taxable) income portion in the amount box.

       7.  Continue

[Sue52]

Paperwork received does not clarify tax treatment on this class action distribution. What is the most conservative method to report? Just do 'Misc Income', and can you do that if you don't receive a 1099?