401k r/o distribution check deposited into Inherited IRA

Submitted by Geoffrey Kasher on Wed, 2017-09-20 14:44

I recently took over an Inherited IRA account from another advisor.

It seems that earlier in the year the advisor accidentally had the client deposit her personal 401k rollover monies into a decedent inherited IRA. The client is a non-spouse beneficiary. The client is also 62 y/o.

I checked with my BD and since the deposit was done at the beginning of the year nothing can be done to cure the error.

what are my options with these monies? Can I distribute them and put them into a new R/O IRA to avoid the tax?

Is there any way to cure this?

Thanks in advance.



Submitted by Alan - IRA critic on Wed, 2017-09-20 15:12

Was this a newly created inherited IRA?  How is the inherited IRA titled and who shows as the decedent?

Submitted by Geoffrey Kasher on Sat, 2017-09-23 13:42

The inherited was created mid-2016. The uncle shows as the decedent and titled with clients name

Submitted by David Mertz on Sat, 2017-09-23 14:52

  • *Something* needs to be done to fix this.  The BD cannot simply shrug off the mistake in allowing a contribution to be made to an IRA inherited by a non-spouse beneficiary.  The inherited IRA contains funds that it is not permitted to contain.
  • It seems to me that the amount deposited in the inherited IRA would have be treated as an excess contribution to the inherited IRA and be returned by a return of contribution (with allocable earnings or loss).  Although it’s an odd scenario, since the deposit to the inherited IRA occurred in 2017, I would expect the 2017 Form 1099-R reporting this distribution to have code 8 in box 7.  Since it’s an inherited IRA, it would probably also have code 4 (codes 4 and 8 together is a permitted combination).  The taxable amount of this distribution would be the earnings.
  • Since this inherited IRA is not an account eligible to receive any rollover, no rollover of the 401(k) distribution has actually occurred.  The rollover can be completed under Rev. Proc. 2016-47 certification by reason 3.02(2)(c) of that procedure that the rollover would qualify for a waiver of the 60-day rollover rule.

Submitted by Geoffrey Kasher on Mon, 2017-09-25 13:46

Thanks DMx. The previous Rep had the client include a letter of instruction telling Pershing to make the deposit. Pershing is saying that because of the letter they can’t reverse the transaction. Doesnt seem right to me either. The R/O monies have been in a MM account since it was deposited. 

Submitted by David Mertz on Mon, 2017-09-25 15:40

While Pershing might not be able to treat it as a mere bookkeeping error and make the correction on their books without any reportable transactions, I don’t see why they would not be able to treat it as an excess contribution and make the reportable corrective distribution, then deposit the money in a proper, owned traditional IRA as a reportable rollover contribution (albeit late under self-certification) as I mentioned.

Submitted by Alan - IRA critic on Tue, 2017-09-26 19:14

Pershing has not done any tax reporting yet for 2017, so I do not understand why they could not re deposit this rollover along with any earnings in an owned IRA account. That would be easier and more direct, but you could also fall back on the excess contribution treatment as Plan B if they would only recognize that option. Some questions – 1) What was the payee wording on the direct rollover check? It could not have reflected an inherited account, so it should not have been deposited into an inherited account. For a non spouse an inherited account can only accept a direct rollover for a beneficiary, not an owner. An error was made, but it is not clear who caused it. Some of these situations start with an error which is then aggravated by others completing the transaction such as this advisor or Pershing itself by accepting instructions not allowed under the tax code.  2) Now that Pershing has accepted this contribution, what do they intend to report to the IRS on Form 5498? The recipient’s name will not match up to the name on the 1099R which might cause additional IRA issues. 

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