Inherited 401k to IRA Mistake

Submitted by Mathew Wynn on Mon, 2023-01-30 07:30

Hello,

I recently inherited a 401k after my Uncle passed. I decided to transfer this to a different custodian (Fidelity to Vanguard) and put it into an inherited IRA.

Unfortunately, the IRA was set-up incorrectly and is currently a rollover traditional IRA – so it is not identified as an inherited IRA and it isn’t titled correctly. Vanguard didn’t seem to want to or maybe they can’t fix it.

I’m not sure where to go from here. Is this something a custodian should be able to fix, and should I push for that? Or am I out of luck and I need to account for this somehow on my taxes?

I was planning on starting to take distributions out this year but I’m stuck as I’m not sure if that would incur a 10% penalty since it is not currently an inherited IRA. I am 32 by the way.

Thank you,
Mat



Submitted by Alan - IRA critic on Mon, 2023-01-30 15:25

  • If the rollover was done by direct rollover and if the IRA balance was 0 at the time of rollover, VG should be able to simply retitle the IRA properly as an inherited IRA. That said, most of the reps there are probably unaware of this and there is no clear IRS guidance on this issue.
  • That said, suggest you review the following thread involving a similar situation. The beneficiary contacted the SEC and got a favorable ruling. The link in the thread to Appleby’s retirement dictionary is no longer active, but Denise Appleby is a noted authority on these matters.
  • (448) Vanguard won’t fix IRA misclassification [solved] – Bogleheads.org
  • Don’t take any distributions until this is resolved. You might also wait for your 1099R for the direct rollover as it will be coded 4 (death benefit). That alone documents that a rollover to an owned IRA is disallowed. 

Submitted by David Mertz on Mon, 2023-01-30 16:32

The Form 1099-R needs to be coded 4 and G together to indicate a direct rollover.  (If it has code 4 only, the Form 1099-R implies a distribution that was not eligible to be put into an inherited IRA because doing so would involve in impermissible indirect rollover.)

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