Inherited 401(K) deposited into a Regular IRA

Submitted by Steven Wolf on Mon, 2015-08-31 16:41

I have a client that was a non-spouse beneficiary of a 401(K) in the year 2013. The decedent had started taking regular distributions prior to 2013. When the client received the 401(K) balance in 2013, the 1099-R was coded G4 and the receiving custodian deposited the balance in the client’s regular IRA, basically intermingling the funds.

Issue # 1, can the custodian go back and un-mingle (is that a word?) the inherited IRA and set it up in a separate inherited IRA account?

Issue #2, since the 2014 RMD was missed, I assume we will request a waiver for the 50% penalty, and that this is taxed when received (as opposed to when it should have been distributed). Just looking for confirmation on that.



Submitted by Jose Morales on Mon, 2015-08-31 18:47

This is complicated because an indirect rollover would not be allowed to an inherited IRA, however I don’t see how a PLR can be obtained in any other way than a request to extend the 60 day rollover period which would only apply to an indirect rollover.  Also, if the amounts are small enough a PLR would not be worth the trouble even in a situation were an indirect rollover, and the extension of the 60 day rollover period, would be an option.  What I can say is that as it stands an excess contribution occurred in 2013 for the amount of the ineligible rollover (minus any contributions that the IRA owner was qualified to make for that tax year).  The amount of the excess was subjext to a 6% penalty for each year it remains in the IRA.  There would be no issue with the 2014 RMD as the full amount of the 401K was distributed in 2013 and incorrectly rolled over to an IRA that should not have received the funds.

Submitted by Alan - IRA critic on Tue, 2015-09-01 22:32

  • Had this transfer been made into a new IRA account improperly titled as an owned IRA, this error could have been fixed. See this explanation:     http://www.retirementdictionary.com/faqs/decedentsnameinheritedira
  • However, apparently the receiving IRA account already held owned IRA funds so now the balance is commingled. How did this occur?  The 1099R shows that the first custodian processed this as a direct trustee transfer from an IRA that had been retitled as an inherited IRA. Inherited IRA funds of NON SPOUSE should only be accepted into a similarly titled inherited IRA? It appears that the receiving custodian mishandled this transfer, but it may take some leverage to get them to correct it. What is needed to fix this would be to have the new custodian calculate the earnings on the inherited dollars just like an excess contribution and then directly transfer this amount into a propertly titled inherited IRA as smwolf has asked. Has such an IRA already been opened? Did the client have ANY hand in contributing to this error?

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