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Fair Fund checks
Old 07-01-2011, 10:43 AM   #1
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Fair Fund checks

So... I received a few of these “Fair Fund” checks as repayment for some market timing shenanigans that may (or may not) have occurred years ago while I owned several mutual funds. While no guilt has been admitted by the MF company, they and the SEC agreed to send me a couple bones anyway - just in case I was negatively affected.

I imagine most of these checks are simply reinvested into the original account - based on the “payee” on the checks. In my case, it’s from my Roth IRA.

Well... I’m now fully retired and I do not earn income. I am unable to contribute to my Roth IRA. A year ago, I made a mistake and sent one of these Fair Fund checks to be deposited back into my Roth IRA. I figured the $10 reimbursement was originally from my Roth IRA so that’s where the check should be deposited. I was wrong. Uncle Sam classified it as an excess contribution and I had to reverse it out and pay a crappy penalty.

This year... I received another Fair Fund check for about $13. It’s made payable to:

IRA FBO (my name)
or successor trustee or custodian
Pershing as custodian
Roth Account
(my address)

I know I can’t put it back into my Roth IRA. If I could get my bank to cash it for me, would that somehow trigger Uncle Sam to slap me with another penalty?

Anyone else (with no earned income) receiving these types of checks? If so, how do you negotiate them?

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Old 07-01-2011, 11:14 AM   #2
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I'd be interested to know how the IRS got wind of it and what they based their decision on. Or was it Pershing that classified it as a contribution when it was made out to them and the money was always part of your IRA? Frankly, I would have argued the point with the custodian, it wasn't new funds supplied by you to the IRA account. I suspect the custodian classified it wrong.
At the CPA firm I work at, we classify these checks as an early distribution if cashed rather than deposited with the custodian. The payments are made to make you whole for possibly losing money due the funds inappropriate actions.


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Old 07-01-2011, 11:50 AM   #3
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Did you try calling the 800 number for that particular fund family to see if they are any help? I looked at one of the companies involved, and their FAQ states to call in that situation.

I agree with RE2Boys that most likely the contribution was classified incorrectly as it's not a new contribution but rather restitution for damages you supposedly suffered.

I wouldn't just try to cash the check that's made out to your Roth at a regular bank as if it is caught, there could be penalties. From a friend's experience, I know that people whose checks should be made out to a qualified retirement account that just want the cash have to fill out tax forms before the fair fund will reissue the check and then a 10% penalty and income tax withholding. Each distribution has tax consultants and I'm sure that information is getting transmitted to the government.

I guess the question is whether it's worth the hassle for $13, but probably at least worth a call.
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Old 07-02-2011, 09:41 AM   #4
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If it is made out to IRA FBO <you>, then you can deposit it into an IRA that you own of the same type, a ROTH in this case. If you cash it, that would be classified as a distribution.

I seem to get one of these about every 18 - 24 months.

But hey, I'm not a tax pro.
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