Inherited IRA (spouse and non spouse)

Submitted by Thomas Broznowicz on Mon, 2015-11-30 14:52

Multiple Beneficiaries of original traditional IRA. My mom died in 2011 (age 66). She left an IRA (50-50 split) to my dad (her spouse age 74 at the time of my mom’s death) and me (her son). The IRA was set up at a Credit Union and they divided the IRA into 2 inherited IRAs (before 9/30/2012). One in my dad’s SSN and one in my SSN. We did not seek professional help. So, we were taking the advice of the Credit Union only. They told us that we had to draw out all the funds by the 5th year of my mom’s death. In 2014, I received an advertisement from Vanguard about inherited IRAs. We called them and transferred both accounts (my dad’s inherited IRA and my inherited IRA). Vanguard told us about the stretch plan. I (45yo) immediately took out the RMDs for 2012, 2013, and 2014. I was able to received forgiveness from the IRS for the missed 12&13 RMD. Vanguard told us that my dad would NOT have to receive an RMD until my mom would’ve reached 70.5 (which is this year). My dad contacted Vanguard last week to withdraw the RMD from his account. They told him that he missed the 12, 13, & 14 RMD. That because he was NOT the sole beneficiary of the IRA, that he needed to do this in order to continue the ‘stretch’. This contradicted what they told us last year, so I contacted TRowe Price, Fidelity, and Charles Schwab and asked them this question. All three said that once the Credit Union separated the accounts (in 2012) that they became 2 complete separate ‘sole owned’ IRAs. We called Vanguard back and explained this to them, but they insisted the others were not correct. I’ve looked at tons of articles on the internet and find conflicting sides. Question: Since the IRA was divided into 2 separate accounts (within the allotted time), can my dad treat his Inherited IRA as the sole spouse (and start RMDs when my mom would’ve turned 70.5) or is Vanguard correct and he missed the RMDs to date?



Submitted by Alan - IRA critic on Mon, 2015-11-30 18:17

Vanguard is not correct and should be provided with the following reference (However, they don’t have the authority to force out distributions in any case). The applicable citation is Q &A 2 of IRS Reg 1.401(a)(9)-8 defining the separate account rules where the deadline to create such separate inherited IRA accounts is 12/31 of the year following the year of owner’s death. Effectively, this extends the 9/30 deadline for beneficiairies that remain on 9/30. Applicable portion of Q&A2 is copied below:

Q-2. If an employee’s benefit under a defined contribution plan is divided into separate accounts (or under a defined benefit plan is divided into segregated shares), do the distribution rules in section 401(a)(9) and these regulations apply separately to each separate account?A-2. (a) Defined contribution plan. (1) Except as otherwise provided in this A-2, if an employee’s benefit under a defined contribution plan is divided into separate accounts under the plan, the separate accounts will be aggregated for purposes of satisfying the rules in section 401(a)(9). Thus, except as otherwise provided in this A-2, all separate accounts, including a separate account for employee contributions under section 72(d)(2), will be aggregated for purposes of section 401(a)(9). (2) If the employee’s benefit in a defined contribution plan is divided into separate accounts and the beneficiaries with respect to one separate account differ from the beneficiaries with respect to the other separate accounts of the employee under the plan, for years subsequent to the calendar year containing the date as of which the separate accounts were established, or date of death if later, such separate account under the plan is not aggregated with the other separate accounts under the plan in order to determine whether the distributions from such separate account under the plan satisfysection 401(a)(9). Instead, the rules in section 401(a)(9) separately apply to such separate account under the plan. However, the applicable distribution period for each such separate account is determined disregarding the other beneficiaries of the employee’s benefit only if the separate account is established on a date no later than the last day of the year following the calendar year of the employee’s death. For example, if, in the case of a distribution described in section 401(a)(9)(B)(iii) and (iv), the only beneficiary of a separate account under the plan established on a date no later than the end of the year following the calendar year of the employee’s death is the employee’s surviving spouse, and beneficiaries other than the surviving spouse are designated with respect to the other separate accounts with respect to the employee, distribution of the spouse’s separate account under the plan need not commence until the date determined under the first sentence in A-3(b) of § 1.401(a)(9)-3, even if distribution of the other separate accounts under the plan must commence at an earlier date.

Submitted by David Mertz on Mon, 2015-11-30 18:32

  • Also be sure that Vanguard titled the IRA as inherited from your mom with your dad as beneficiary, and not as an account owned by your dad.  If the IRA was instead titled as owned by your dad, he was indeed required to take RMDs for years that the IRA was owned by your dad rather than being an inherited account.
  • Assuming that the account is currently titled as an inherited account, at this point your dad can take ownership of the account and his RMDs will be somewhat lower than if he continues to maintain the IRA as an inherited IRA.  Your dad’s beneficiaries will then also be able to stretch based on their own ages rather than being required to continue your dad’s RMD schedule.

Submitted by Thomas Broznowicz on Mon, 2015-11-30 19:19

Thank you very much for your help and quick responses.The IRA is titled: My Dad’s Name–Inherited IRA.At this point, he will take out the RMD for 2015 and then will be able to roll the inherited IRA over (probably with Fidelity) into his own personal IRA. If I am understanding this correctly…

Submitted by David Mertz on Mon, 2015-11-30 19:58

If your dad takes ownership this year instead of next year, this year’s RMD would be based on his own age as if he had owned the IRA the entire year rather than as a beneficiary based on your mom’s age.

Submitted by Alan - IRA critic on Mon, 2015-11-30 20:13

I agree he should do the rollover to his own IRA ASAP. If he completes this before year end, he is deemed to have owned the IRA the entire year and his lower RMD as owner will replace the higher RMD required as a beneficiary for 2015 (year mother would have reached 70.5). FYI – there is also a default rule where a surviving spouse who fails to take the full RMD as a beneficiary is deemed to have assumed ownership. But rather than maintain a conflict between the registration of the IRA and it’s RMD status, the actual rollover should be done and father should name his own beneficiary on his IRA at the time. Note that his 2015 RMD as owner is calculated using the Uniform Table and the value in his inherited IRA on 12/31/2014.

Submitted by Thomas Broznowicz on Tue, 2015-12-01 11:18

Thanks again for all your help.

Submitted by Thomas Broznowicz on Tue, 2015-12-01 14:15

I hate to be a pain. But, I called Vanguard back and spoke with a supervisor. He told me that their (Vanguard’s) interpretation is the same as they stated before. AND that they are basing their interpretation on IRS Regulation Proposal 1.408-8(A), Q&A(4)(b). I tried to google this ‘proposal’ but could not find a (4)(b). He was very ‘matter of fact’ and said that 1.401 is not for IRAs, that 1.408 is what they use for their interpretations of IRA (and inherited IRAs). Again, I appreciate all of your help. Can you please let me know if this 1.408(A), Q&A(4)(b) even exists and if there is anyway that this can conflict with the 1.401?

Submitted by Thomas Broznowicz on Tue, 2015-12-01 14:15

I hate to be a pain. But, I called Vanguard back and spoke with a supervisor. He told me that their (Vanguard’s) interpretation is the same as they stated before. AND that they are basing their interpretation on IRS Regulation Proposal 1.408-8(A), Q&A(4)(b). I tried to google this ‘proposal’ but could not find a (4)(b). He was very ‘matter of fact’ and said that 1.401 is not for IRAs, that 1.408 is what they use for their interpretations of IRA (and inherited IRAs). Again, I appreciate all of your help. Can you please let me know if this 1.408(A), Q&A(4)(b) even exists and if there is anyway that this can conflict with the 1.401?

Submitted by David Mertz on Tue, 2015-12-01 17:19

  • The only Proposed Regulation that I can find that has a Q&A-4(b) to which Vanguard might be referring is EE-113-82.  You can find it by searching Proposed Regulations at http://www.legalbitstream.com for EE-113-82 issued in 1987.
  • Q&A-4(b) reads
  • (b) In the case of an individual dying after December 31, 1983, the only beneficiary of the individual who may elect to treat the beneficiary’s entire interest in the trust (or the remaining part of such interest if distribution thereof has commenced to the beneficiary) as the beneficiary’s own account is the individual’s surviving spouse. If the surviving spouse makes such an election, the spouse’s interest in the account would then be subject to the distribution requirements of section 401(a)(9)(A), rather than those of section 401(a)(9)(B). An election will be considered to have been made by the surviving spouse if either of the following occurs: (1) any required amounts in the account (including any amounts that have been rolled over or transferred, in accordance with the requirements of section 408(d)(3)(A)(i), into an individual retirement account or individual retirement annuity for the benefit of such surviving spouse) have not been distributed within the appropriate time period applicable to the decedent under section 401(a)(9)(B), or (2) any additional amounts are contributed to the account (or to the account or annuity to which the surviving spouse has rolled such amounts over, as described in (1) above) which are subject, or deemed to be subject, to the distribution requirements of section 401(a)(9)(A). The result of such an election is that the surviving spouse shall then be considered the individual for whose benefit the trust is maintained.
  • However, I don’t see how this Q&A-4(b) has any relevance to determining how separate accounts established by the deadline are to be treated.
  • Both EE-113-82 and CFR 1.408-8 Q&A-1(b) indicate that he rules in CFR 1.401(a)(9)-8 apply to IRAs.  This means that the spouse beneficiary of a separate account established by the deadline is a sole spouse beneficiary of the IRA maintained for the surviving spouse’s benefit and can delay RMDs until the year the owner would have reached age 70½, as far as I can determine.

    • Submitted by Alan - IRA critic on Tue, 2015-12-01 17:25

    • 1.401 applies to IRAs except where overridden by 1.408. Therefore 1.408-8 could and does have some IRA specific provisions in it such as surviving spouse IRA ownership which of course cannot be done with a qualified trust. I cannot locate the proposed reg either, and if it is just proposed it is not yet official but is subject to comment from the public. I will continue to search, but cannot comment without reviewing a copy of it. It would be highly significant if IRA application of the separate account rules was compromised by a new regulation.
    • The basic issue is awkward because the IRS does not define when the “sole beneficiary” status is determined, which is the reason that I posted the prior Reg regarding separate accounts. The key sentence is the last sentence of this Reg that refers to 1.401(a)(9)-3 which refers to a surviving spouse’s start of beneficiary RMDs
    • If VG is taking the position that your Dad failed to take the RMDs required of a spousal beneficiary, then to be consistent they would invoke the ownership default rules which deem that a spousal beneficiary who does not take any beneficiary RMD in time becomes the IRA owner. The RMD as owner would be lower than the RMD as beneficiary. To further this train of thought, if your Dad became the owner by default he can aggregate his RMDs with any other IRA he owns and the IRA custodian cannot force him to withdraw ANY amount from a specific IRA account. Even without the deemed ownership issue, VG cannot force him to take a larger distribution than he wants and they have no authority to require him to pay an excess accumulation penalty for missed RMDs. You might have to call their bluff on this one or at least use this information as leverage to get them to send you a copy of this proposed Reg.

    Submitted by Thomas Broznowicz on Tue, 2015-12-01 18:19

    Thanks again for all your help. I think my dad is going to take out the RMD for 2015 from the Inherited IRA (even though it is a higher dollar amount), then convert the Inherited IRA to his personal IRA. He is afraid that conversion will take too long (down to 30 days now).

    Submitted by Alan - IRA critic on Tue, 2015-12-01 18:28

    It should take very little time to roll the inherited IRA to his own IRA, and he could request the owner’s 2015 RMD be withdrawn as part of the same request.

    Submitted by Thomas Broznowicz on Tue, 2015-12-01 18:30

    Thanks Alan. We will call Vanguard today.

    Submitted by Thomas Broznowicz on Wed, 2015-12-02 21:45

    I have another question. I called Vanguard to have my dad’s spousal inherited IRA assumed into a Traditional IRA. Vanguard said that their interpretation is that my dad needs to take out the RMD for the Inherited IRA before he can assume it to the Traditional. I said that was NOT my understanding and they responded back that this is their interpretation of the IRS rules AND if my dad does not take the RMD (from the Inh IRA) this year, he may be subject to fines from the IRS. Question: is Vanguard correct? Or is it a gray area and to just be on the safe side, my dad should follow their advice (even though it is more $ that would need to be taken this year).

    Submitted by Thomas Broznowicz on Thu, 2015-12-03 17:53

    I have another question. I called Vanguard to have my dad’s spousal inherited IRA assumed into a Traditional IRA. Vanguard said that their interpretation is that my dad needs to take out the RMD for the Inherited IRA before he can assume it to the Traditional. I said that was NOT my understanding and they responded back that this is their interpretation of the IRS rules AND if my dad does not take the RMD (from the Inh IRA) this year, he may be subject to fines from the IRS. Question: is Vanguard correct? Or is it a gray area and to just be on the safe side, my dad should follow their advice (even though it is more $ that would need to be taken this year).

    Submitted by Jose Morales on Thu, 2015-12-03 19:40

    In the end, Vanguard cannot force your dad to do anything.  As a custodian, they simply process the transactions requested of them even if they feel that the transactions could have unfavorable consquences (such as a 21 year old closing their IRA to buy a Corvette).  The consequences of those transactions lie on the account holder, which in this case is the beneficiary.  Thank them for their advice and then insist they process your request.

    Submitted by Alan - IRA critic on Thu, 2015-12-03 19:46

    • I agree. This is a case where one incorrect interpretation leads to another. Because Vanguard will not recognize that the separate account rules can be used to achieve “sole spousal beneficiary” status for your Dad, he cannot elect to be treated as the owner of the IRA, could not delay beneficiary RMDs until your Mom would have reached 70.5, and could not recalculate his beneficiary RMDs in years before now. But they do not have ANY responsibility to enforce what they think are the RMD rules if your Dad disagrees with their interpretation. Remember, those of us here, Vanguard’s original rep, and 3 major IRA custodians all disagree with Vanguard’s position on this. There have never been any indications from the IRS either supporting Vanguard’s new position. A beneficiary RMD for a 78 year old is 78% higher than an owner RMD and your Dad should not be forced to withdraw that amount if he does not need it. I don’t think VG can be convinced they are wrong now, but you might tell them that you will handle your RMDs with the IRS and simply ask them to transfer the inherited IRA into your Dad’s name and then withdraw x$ equal to the owners RMD before the end of the year. They do not have the authority to refuse that request and have already satisfied (or tried to) IRS requirements for custodians.

    Submitted by Thomas Broznowicz on Fri, 2015-12-04 12:21

    Thanks again. My dad is opened the Traditional IRA (online) and sent in the letter to Vanguard to assume the funds from Inh IRA to Trad IRA. Hopefully last question: Will my dad will now use Table 3 (Uniform Life Table)? 2015 Age 77 – divisor is 21.2.. Next year 2016 Age 78 – divisor is 20.3… 79 = 19.5, etc. etc. What I’m getting at is that VG said with the Inh IRA you need to subtract 1 each year. But because this is now a personal Traditional IRA, each year will ‘reset’. Hope my question make sense…. And again Thank You very much for all your help.

    Submitted by David Mertz on Fri, 2015-12-04 17:33

    Yes, as owner, he recalculates every year using the Uniform Lifetime table rather than using the subtract 1 each year method.

    Submitted by Alan - IRA critic on Fri, 2015-12-04 17:59

    • There are two ways a “spousal rollover” can be done from an inherited IRA. One is an actual rollover where a distribution is made to your Dad and he rolls it over within 60 days to his own TIRA wherever he opened it. Withholding generally should be declined. He can then take the ownership RMD as outlined above before year end.
    • If he opened the TIRA at VG where the inherited IRA is held, the other method of doing the spousal rollover will likely apply. That is a non reportable direct Trustee to trustee transfer to his new owned TIRA account. Since a direct transfer is NOT a distribution, there is no need to withhold an RMD from the transfer, but Dad can take the ownership RMD as soon as the funds are deposited in the new TIRA.
    •  Given Vanguard’s interpretations to date, no telling how they will react to the letter. Can you report back here how this turns out? It is quite interesting because having issues in this manner is pretty unique. Final question, in the recent discussions with VG, did they all go through the same rep?

    Submitted by Thomas Broznowicz on Mon, 2015-12-07 13:43

    Thanks guys. Alan–Each time that I called Vanguard, I got a different person. Each person (after going thru the whole story) ended up putting me on hold (everytime) then coming back on the line and saying “your dad was supposed to take out RMDs for the past 3 years”. I figure that there is a supervisor in the wings (which I did ask a few times to talk with, but was never transferred to him/her) that has this interpretation. I will definitely update you on what happens with the letter to VG.

    Submitted by Thomas Broznowicz on Wed, 2015-12-09 11:51

    UPDATE! Well, Vanguard received the letter and processed the ‘assumption’. But…. they took taxes out of the entire amount. My dad and I called them. Explained to the first person the situation, then (of course) got transferred to a different person. Explained the entire situation again (very frustrating). The second person understood what I was trying to say. She researched all the information (I guess the letter and all the phone calls). We were on hold for like 10 minutes. She came back on the line and said that she understands what we were ‘trying’ to do. I said this isn’t what we are trying to do, this is what we want to happen, even if VG doesn’t agree. The said she needed to go through this with the ‘resolution department’ and put us on hold again. This time for about 15 minutes. She came back on the line and said that the account will be made whole within 3-5 business days. With that being said, I asked “is this a recordable transaction” she said “yes, it is recordable, but not taxable. We will receive a 1099R for this transaction, but it will be coded as non-taxable.” I hope they code this thing as such. Alan, I guess they are interpreting this as a “spousal rollover” (your first option above) and not a Trustee to Trustee event. I hope the IRS doesn’t come back a say that the RMD from the Inh IRA should’ve been taken out before the rollover?

    Submitted by Alan - IRA critic on Wed, 2015-12-09 18:10

    • Yes, if there will be a 1099R, it is processed as a distribution. It will not be taxable if your Dad reports it as a rollover on line 15 of Form 1040. As for the withholding, there is a default rate of 10% on any IRA distribution, so unless he rejects withholding, that is what comes out. He must replace that 10% within 60 days to make the rollover complete and avoid tax on the amount withheld. Finally, a reported distribution on a 1099R will be taxable unless the taxpayer reports a rollover on Form 1040. That is up to the taxpayer, not the IRA custodian.
    • Dad needs to take out the 2015 RMD, but not the prior years since he should be considered the sole beneficiary on the inherited IRA whether VG thinks so or not.

    Submitted by Thomas Broznowicz on Mon, 2015-12-14 14:54

    Alan, thanks again for all your help. I guess I didn’t supply all the information in my original discussion background. The ‘transfer’ from the original Credit Union to Vanguard did not officially happen until February 2015 (this year). Now a ‘rollover’ was performed in Dec 2015 (to the same account). From what I am reading I (my Dad really) can perform only ONE rollover to an IRA in a 12 month period. If I am correct, the transaction from Credit Union to VG is a transfer NOT a rollover. However, IF we receive a 1099R from he CU, then we will need to fight with them that the 1099R should be rescinded. I know that I am foreshadowing here, but from my experience with this CU, this is probably going to be the case. I guess my question is “what grounds will I have (or how will I be able to prove to the IRS) that the CU to VG transaction was a transfer and not a rollover”? Again, I want to thank everyone that has helped me out on this site.

    Submitted by Alan - IRA critic on Mon, 2015-12-14 16:26

    • I assume that the transfer to Vanguard of YOUR share was processed in the same manner as your Dad’s share. Your share had to be done by direct transfer, so it would be inconsistent of the CU to 1099R your Dad’s share and not do so with yours.
    • In the event they do issue a 1099R for your Dad’s share and you cannot get it rescinded, then keep copies of anything available that would prove that your Dad never received a distribution. Check VG’s record of the inherited IRA that was opened since it may indicate a transfer. However, since actual enforcement of the one rollover rule is mainly done at the custodian end, if Vanguard did not resist in setting up his owned IRA account, it is extremely unlikely that he would hear from the IRS about the one rollover rule. Further, there might not be a 1099R from Vanguard either on the rollover to his own IRA, as that should be done as a “same trustee” transfer. Any IRA movement of funds where the account owner does not receive a check made payable to him is a transfer, not a reported rollover.  The term “spousal rollover” is applied loosely to describe any method in which the surviving spouse moves the assets from an inherited IRA to an owned IRA including a direct transfer.

    Submitted by Thomas Broznowicz on Mon, 2015-12-14 18:38

    Thanks, Alan. All of the transaction history documents for the Inherited IRA state ‘Employee Asset Transfer’, nothing states rollover and the VG instructions on the IRA Asset Transfer Kit states for the existing trustee (in this case the CU) to make the check payable directly to Vanguard Trust Company….. The statement for the Inh-IRA to TIRA states ‘Transfer to another account’ (still nothing stating rollover). However, when I called VG about the withheld taxes, they told me that this is a rollover and that a 1009R will be sent to us, but it will not be taxable. It was when I researched the Line 15 on 1040 on TurboTax (per your advice above) that I came across an article with a scenario similiar to mine and this person received a 1099R (as a rollover) from both trustees. That is what scaried me. This person ended up paying for an IRS PLR because the trustees would not rescind the 1099R(s). Thanks again for all your help.

    Submitted by Alan - IRA critic on Mon, 2015-12-14 20:53

    I did not look back at the entire thread and forgot about his withholding. The wittholding is a sure indicator that there will be a reportable distribution on a 1099R, but they could have done a transfer which would have avoided both the withholding and the 1099R. Seems like your Dad’s inherited IRA is exposing a number of things that Vanguard does differently from other custodians, and can have negative consequences.

    Submitted by Thomas Broznowicz on Fri, 2015-12-18 15:01

    Alan, Thanks again. Vanguard seems to have finally moved the Inherited IRA (in its entirety) over to the Traditional IRA . They called this a ‘direct rollover’, which they say a 1099R will be produced, but will show the entire amount as being ‘non-taxable’. VG said that a direct rollover and transfer are interchangable terms. I disagree, because from what I am reading (not that I’m an expert) says that a transfer is non-reportable. However, I voiced my concern to VG about ‘what if the Credit Union also produces a 1099R for the transfer to VG’. VG assured me that they will documentation, including the cancelled check from the CU to VG, to prove that this transaction was(in VG words also a direct rollover) not an indirect rollover. I guess now we just play the waiting game and see what we get from the CU. Just wanted to give you an update, and again thanks for all your input. On a side note (and basically another question to you) if worse comes to worse and we are taxed on the entire amount. Do we then have the option of rolling/transfering this into a ROTH IRA, since all the taxes would’ve been paid? We then have no RMDs for my dad’s lifetime and it grows (or falls as of lately) tax-free forever. When it is then inherited by the next of kin, RMDs are required, but not taxed?.

    Submitted by Alan - IRA critic on Fri, 2015-12-18 17:00

    • I agree with you that at this point, you are best served to wait until the end of January to see what 1099R forms are issued. If he gets one from each custodian which means two distributions, then just collect evidence how each was done including any additional documentation you can get from Vanguard regarding how the funds were physically moved. Then if the IRS contacts him on the basis of 2 rollovers within 12 months, you can send this evidence to them and I am reasonably sure they will drop the case. In the past there have been very few cases of the IRS enforcing the one rollover rule, as that has been left to the IRA custodians to enforce. Vanguard never resisted doing this last rollover, did they?
    • I don’t think the IRS has the authority to waive the one rollover rule in a PLR request, as you never see such requests filed. For the Roth conversion idea, people have been converting to a Roth when they are holding a second distribution that is not eligible for rollover and the IRS has not objected. And they have also not objected if the taxpayer recharacterizes the conversion to get the money back into a TIRA and eliminate the conversion tax bill. If there is enough money involved here, it is possible to apply to the IRS to extend the 60 day rollover time limit because of the custodian mishandling these transactions. PLR fees for rollover requests are based on the account balance. If the IRS extends the 60 days, the distribution could be converted. Hard to predict the IRS reaction to this exact fact pattern.

    Submitted by Thomas Broznowicz on Fri, 2015-12-18 19:22

    Thanks Alan. No, Vanguard did not resist the last rollover. However, Vanguard is NOT interpreting the Credit Union to VG transaction as a distribution (which it should not be). VG is calling the CU to VG a direct rollover (which in their interpretation is the same as a custodian to custodian transfer-their words, I hope the IRS agrees). Nor are they interpreting the Inherited IRA to TIRA as a distribution (now calling this a direct rollover as well), BUT they are still sending a 1099R for that. I’m not sure if all of the criteria for an automatic waiver is met and to request a waiver looks like $1500 (in this case). Sorry, but my logic is sometimes hard to follow–If the IRS does tax the full amount (because of the twice in one year rule and they viewed the Inh IRA to TIRA as a 100% distribution) and we pay the taxes on it (2015 year). The money will still be in the TIRA, but now the entire amount has already had the taxes paid. Can we then just roll this over into a RIRA, or would we have to pay taxes again? From my math, if all the taxes are paid now (and roll into Roth) or pay taxes on each distribution (RMD over xx years) the final amount comes out to within pennies. I did my math over a 10 year span @ 5%, no matter how many years and what interest, it should be in direct proportion. Sorry again to keep bugging you. I just find this compelling.

    Submitted by David Mertz on Fri, 2015-12-18 19:52

    • In IRS and tax code terminology, “direct rollover” only refers to the transfer of funds to or from a qualified retirement plan, not a transfer between IRAs.  For IRA-to-IRA transfers, the IRS and tax code use the terms “direct transfer” or “trustee-to-trustee transfer”, never the word “rollover”.  However, many custodians mistakenly use Form 1099-R code G, “direct rollover,” to report transfers between IRAs.  If Vanguard did issue a code G Form 1099-R in this case, it would also have to include code 4 and would have the IRA/SEP/SIMPLE box marked.  Technically this Form 1099-R would be indicating a rollover from an inherited IRA to a qualified retirement plan, which is an impossibility since such a rollover is not permitted.  However, the IRS seems to tolerate improper use of code G to report nonreportable transfers, although given the inherited nature of the account, combining code G with code 4 and the marking of the IRA/SEP/SIMPLE box, it’s not clear how the IRS would react.
    • Given the nature of the transfer as Vanguard described it (no distribution made payable to your dad), the amount transferred (but not the tax withholding) meets the requirements of a trustee-to-trustee transfer and is not a distribution, no matter how they report it.  If the IRS receives a From 1099-R for this and the IRS questions it, the documentation showing that no distribution was made to your dad should be sufficient to satisfy the IRS that the reporting was in error.
    • Note that tax withholding can *never* be reported on a code G Form 1099-R because the amount withheld for taxes is by its nature an amount that is not directly rolled over.  Tax withholding would have to be reported on a separate code 4 Form 1099-R (with no other codes, in this case).  However, custodians sometimes mistakenly report withholding on a code G Form 1099-R.
    • Because the one-rollover-per-12-months rule is a statutory limit and there is no statutory provision for the IRS to allow exceptions, the IRS cannot waive this rule.  Notwithstanding my second bullet, if the amount directly transferred to the owned account is treated as a distribution and rollover, it seems that there will be a good chance that your dad will receive the Form(s) 1099-R within 60 days of the distribution of the amount withheld for taxes, so it may be possible for this amount to be converted to a Roth IRA before the 60-day deadline.

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