[monilert]

This question is only partially related to taxes. I had a rollover IRA which I rolled into a company 401k. Prior to that, I had bought a brokerage stock. Now, I have received notice that I will get a small payout from a class action lawsuit involving securities litigation in that stock. Its very small, likely less than $1000. My question:

1) Can I get the money directly ?would be a premature distribution and would the lawsuit administrator send a 1099-R and I would be penalized 10% ?

2) But the Rollover IRA no longer exists, so I can't ask for it to be deposited in to the IRA. Will it be OK to ask for it to be sent to the 401k ? Or would that be taxable too ?

[AtlantaTaxExpert]

1) If you get the cash, it WILL be considered an early distribution, subject to federal and state income tax PLUS a 10% Early Withdrawal Penalty.

2) Contact the custodian of the Rollover IRA and request that they send the award to the 401K when they receive it. They may charge a small fee, but it should not be a big problem.

If they REFUSE, then take the award by check and then deposit the check with the 401K custodian, explaining the circumstances why you received it so the depoist is properly documented as a rollover.

[monilert]

ATE thanks very much. But depositing this check is not going to 'taint' my current 401k balance in some way, damaging its tax eligibility or status ? I apologize if I appear paranoid, but I've heard horror stories of people who had to pay large sums because they screwed up some paperwork in 401k transfers.

[AtlantaTaxExpert]

That is the reason you coordinate with the 401K custodian, to avoid the type of mishaps you gave read about.

[ebaines]

I agree with ATE wrote, but I bet that what happens is the cash will be automatically sent to your old IRA (as that is how the stock was registered when the litigation was undertaken), and the IRA custodian will simply add it to your existing zero-balance account. You may indeed be charged an administration fee if the balance of the account after that infusion of cash is too low.

I had a similar thing occur, only in reverse. I left an old job where I had a 401(k) account which was administered by Fidelity. Several months later I rolled that 401(k) into a new rollover IRA account - still at Fidelity - so that 401(k) account was zeroed out, and as far as I was concerned it was dead. Then about 6 years later my former employer was sued and they ended up crediting everyone's 401(k)'s with the settlement, which for me was about $80. That $80 ended up going into my old 401(k), so I rolled it out to my IRA. In my case no fees were assessed, perhaps because my total acounts at Fidelity exceed some minimum value.