inherited IRA distributions

Submitted by Laurie Licata on Wed, 2015-09-16 20:36

Before working with me, I have a client that took previous distributions from his inherited IRA thinking that the 60 day rule would apply. He received an IRS letter stating that he owes taxes on the amount distributed a couple years ago. Since he already re-deposited the distributed amount within the 60 days and will pay the taxes requested by the IRA. Is there a way for him to separate these funds that are already being taxed for when he will take future distributions of these funds?



Submitted by Alan - IRA critic on Wed, 2015-09-16 21:05

He rolled the distributions back into the inherited IRA or an IRA titled with him as owner?  The inherited IRA was not from a spouse was it?

Submitted by Laurie Licata on Thu, 2015-09-17 14:31

He (the owner of the inherited IRA) paid the $ that he took out back into the inherited IRA that he took the $ from.  The inherited IRA was not from a spouse.  

Submitted by Alan - IRA critic on Thu, 2015-09-17 17:25

  • Very surprising that the custodian of this inherited IRA would accept such a rollover since it is clearly not permitted for a non spouse beneficiary. As you indicated, he will have to amend his return (or accept IRS bill for the additional income) to eliminate the reported rollover and add the taxable income for the distribution.
  • Assuming that the rollover back to the inherited IRA occurred prior to 2014, the excess contribution must be corrected using procedures for excess contributions beyond the extended due date. This means he will owe a 6% excise tax for 2014 and all prior years that this contribution was in the inherited IRA at year end. These 6% excise taxes are reported on Form 5329 with a 1040X for past year. Earnings on the excess are not removed in this situation, just the amount of the excess contribution. The distribution is not taxable because tax was already paid on the original distribution and he did not claim a deduction for the contribution. He needs to get this done before year end to avoid another 6% excise tax for 2015 and this will also reduce his balance for calculating his 2016 RMD.
  • Curious about the type of IRA custodian who accepted this rollover. Was it a bank, mutual fund company, or brokerage custodian?

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