Rollover IRA Set Up Instead of Inherited IRA

Submitted by Carol Berger on Fri, 2020-01-17 23:20

New client, husband and wife, were 50-50 beneficiaries of their son’s 401k. I noticed that their IRAs are Rollover and not Inherited IRAs. Not sure how that was allowed to happen. They have been taking RMDs. I haven’t gotten into any details with them yet, but I’m wondering what the consequences could be? And what should be done?

Thanks for any thoughts!



Submitted by Alan - IRA critic on Fri, 2020-01-17 23:35

  • If the inherited 401k balance was rolled into a new rollover IRA account with no other balance and no distributions since, the IRA custodian can properly re title the accounts or transfer the balance to a properly titled inherited IRA without consquences. Even that may be problematic with some IRA Custodians, but if this amount has been commingled with other IRA balances, it’s a disaster and they need to try and work out a solution with the custodian any way they can. And they need to present their documentation to the custodian ASAP since every day that passes makes this error worse. This could end up as a total distribution of the inherited 401k and an excess contribution to the IRA accounts if not corrected. 
  • The IRA custodian is going to report a rollover contribution on Form 5498 in May and the only 1099R forms to match up with are death coded distributions in Box 7. That’s a red flag for the IRS, so the IRA custodian needs to correct this error and NOT report a rollover contribution on Form 5498. Their 2019 year end balance will also be incorrect for the rollover IRAs due to these excess contributions.

Submitted by Carol Berger on Mon, 2020-01-20 18:08

Further details…..The son died in 2016. The 401k money was put into brand new IRAs for each of them and not commingled with anything. From what they’ve told me, they have been taking RMDs since (I don’t know how the RMD was calculated).  I guess the first thing I need to do is see if they can provide the tax forms (5498, 1099R) to see exactly what happened. And then go from there.

Submitted by Alan - IRA critic on Mon, 2020-01-20 19:15

Yes, this is going to take some investigation to determine how this happened and what tax forms have been issued before even determining what course of action to take, if any. Guess this shows how effective the IRS matching program is since the IRS has apparently not contacted the clients.

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