Correcting IRA Rollover to Inherited IRA
It was just discovered that my client has a traditional IRA that should be an inherited IRA. Account was opened in spring with $112,000 and now is $118,000. Original IRA at a different company had a trust as beneficiary and my client was one of the beneficiaries of the trust. I am getting conflicting info on how to handle this. Original distribution to the trust benes was coded as partial distribution (Code 4). I have been told that you can only go from a deceased IRA to an inherited IRA by a transfer and you cannot deposit a check to the benes into an inherited IRA. I have been also told that you can deposit into an inherited IRA by using form 5498. Account is currently incorrectly coded at a rollover. Any Ideas. Thanks.
Permalink Submitted by Alan Spross on Thu, 2010-12-16 23:34
If according to the terms of the trust, the IRA was assigned to the trust beneficiaries, there should be NO distribution from the IRA, just a re titling of the IRA in beneficiary format FBO the beneficiary. But if a check was issued there is a serious problem because what you indicated about direct transfers as a requirement is correct. A check cannot be rolled over to an inherited IRA.
You cannot make a contribution to an inherited IRA unless you are the surviving spouse and you wish to assume ownership, as a contribution will do that. A non spouse beneficiary cannot make a contribution to an inherited IRA. Form 5498 is just the form the custodian uses to report IRA contributions or re titled accounts (eg change of beneficiary from the trust to the individual, and also showing decedent’s name). Therefore, in this case the 5498 should not show a contribution or a rollover, just the change of beneficiary to the individual.
If the inherited IRA was funded correctly by direct transfer, but just has the title incorrect, that does not constitute a taxable distribution and the registration can be corrected by the custodian. If a check was issued in error, the only recourse is to try to return it to the custodian and hope they accept it.