Bad Rollover Advice
I have a client who got bad advice from previous advisor and did not roll inherited IRA to decedent IRA, just cashed it with no withholding. 1. Can we set-up deceded IRA and 2. Can client write a check payable to the new IRA custodian to get the rollover complete?
Michael Smith
Permalink Submitted by Al Fry on Fri, 2009-10-30 15:15
Inherited IRA and Decedent IRA are similar terms. Who owned the IRA? Who was beneficiary? A non-spouse bene cannot do a rollover (other than a Direct Rollover).
Permalink Submitted by John Fuller on Wed, 2009-11-04 20:13
Father was the owner, and three children were beneficiaries.
Permalink Submitted by Alan Spross on Wed, 2009-11-04 20:28
Michael,
As Al indicated, there is no rollover relief available to a non spouse beneficiary who takes a distribution. This is one of those situations where the IRS has never allowed relief because the distribution is not rollover eligible to begin with. Most relief granted by the IRS is for eligible rollover distributions where the time limit was missed.
About all these beneficiaries can do now is to use the funds to help subsidize allowed 401k or regular IRA contributions to partially offset the taxable income. They should also check to see if father had any tax basis (Form 8606) in his IRA that would make a portion of these distributions tax free. And since these distributions will be coded as death benefits, there is no early withdrawal penalty.
As for the bad advice, if the amount in this IRA is substantial, legal action against the advisor may be justified since these beneficiaries have lost the benefit of stretching RMDs over their life expectancies. The action would have to be based on clearly bad advice, not just misinterpreting the advice.
This is probably the most common IRA related error there is. It does seem extreme, and perhaps one day indirect rollovers will be possible for non spouses.