inherited IRA
Client is a sole beneficiary of an inherited IRA. In 2012, the client’s custodian automatically distributed her inherited IRA to her and withheld taxes. The distribution was never requested by her.
Within 60 days (and in 2012), the client opened a new inherited IRA and redeposited the distribution.
Can you comment on the rules/guidelines surrounding these events and what rules have been broken? What tax/penalty will be owed as a result?
What recourse, if any, does she have against the custodian that made the distribution?
Thank you
Permalink Submitted by Bruce Steiner on Mon, 2013-07-01 20:09
There is no provision for a 60-day rollover for a beneficiary of an inherited IRA the way there is for an IRA owner or his/her spouse. The Administration has proposed this for several years, but it has not been enacted. In PLR 201139011, the IRS allowed the restoration of a minor’s inherited IRA that had been misappropriated: http://www.irs.gov/pub/irs-wd/1139011.pdf. Perhaps it might be possible to restore the inherited IRA in this case if the beneficiary did not request a distribution. However, you should check to verify that the beneficiary did not request a distribution.If the custodian erred, it might be willing to pay for the cost of seeking a private letter ruling, to try to mitigate its liabililty.Bruce Steiner, attorney, NYC, also admitted in NJ and FL
Permalink Submitted by Thomas Ferry on Mon, 2013-07-01 21:42
Thank youWill the beneficiary incur any additional penalties for “funding” and IRA in 2012 under the excess contributions provision?
Permalink Submitted by Alan - IRA critic on Mon, 2013-07-01 22:40
The inherited IRA contribution will be an excess contribution treated as an excess regular contribution. The rollover must be removed with any earnings by 10/15 in order to avoid a 6% excise tax on the excess contribution. The earnings will be taxable in 2012 and subject to penalty if client is not yet 59.5. Of course, client will also have to amend the 2012 return to report the full taxable distribution of the inherited IRA including the withheld amount. It would be very unlikely for the custodian to make the distribution without some input from the client, so it should be determined what the reason was for making the distribution in the first place.
Permalink Submitted by Thomas Ferry on Tue, 2013-07-02 13:34
Thank youLet’s say for example the value of the inherited IRA at the time it was incorrectly distributed in 2012 was $20,000. Thirty percent in taxes withheld by the custodian leaves $14,000. Does the client have unitl 10/15/13 to close the new inherited IRA to avoid the 6% excise tax on the excess contribution of $14,000?Is the amendment to the 2012 return required because that’s the year the excess contribution was made? If not, then what’s the reason for amending the 2012 return?Let’s assume the inherited IRA lost value and is now worth less then $14,000. Then no tax and 10% penalty apply (client is under 59 1/2). Is the amendment still necessary?Thanks
Permalink Submitted by Alan - IRA critic on Tue, 2013-07-02 16:54
If there are no gains on the new inherited IRA not eligible for rollover, then the 2012 amended return would include reporting the 20,000 distributed as taxable income, and would also include an explanatory statement regarding correction of the excess contribution to the new inherited IRA, thus avoiding a 6% excise tax for 2012. There will be no 1099R for the corrective distribution until Jan, 2014, and the explanation will explain to the IRS what has been done. The client has until 10/15/13 to remove the 14,000 from the inherited IRA to avoid a 6% excise tax for 2012. If the IRS has already billed the additional tax for the original distribution and did not ask for an amended return, client could avoid the amended return and pass on the explanation until the IRS asks about the situation. Of course, if there were gains on the incorrect rollover, those gains would be taxable and subject to penalty on an amended 2012 return. If the custodian issued the distribution without any justification, client should go after the custodian as noted by bsteiner.