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Tuesday, February 06, 2007


The Internal Revenue Code has strict limitations on amounts that may contributed to an individual retirement account ("IRA"). In a recent Private Letter Ruling, the IRS characterized a contribution to an IRA with funds received from an investment advisor for indemnification of investment losses in an IRA as restorative payments and not "contributions" subject to contribution limits. In allowing for this treatment, the IRS applied the reasoning of Revenue Ruling 2002-45 which allowed similar treatment for qualified plans.

So when will a transfer of funds to an IRA constitute a qualified "restorative" payment? According to the Private Letter Ruling, payments to an IRA are restorative payments only if the payments are made in order to restore some or all of the IRA losses resulting from breach of fiduciary duty, fraud or federal or state securities violations (such as payments made pursuant to a court-approved settlement or independent third party arbitration or mediation award.) In contrast, payments made to an IRA to make up for losses due to market fluctuations or poor investment returns are generally treated as contributions and not as restorative payments.

PLR 200705031

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