Beneficiary IRA lump sum received
A new client gave us a check for deposit to a Roth IRA for approximately $30,000. Per the client, this was money she took as a lump sum distribution from her IRA for the purpose of doing a Roth conversion using the 60-day rollover rule. Now that the money has been deposited to the Roth, we have discovered that the lump sum actually came as a distribution to the client as the beneficiary of someone else’s IRA. She took the lump sum as a beneficiary and cashed it, then gave the check to us to do a Roth conversion. At this point, what is the best option? We can take the money out of the Roth, but can the original lump sum distribution from the decedents IRA be reversed so we can properly set up a benenficiary IRA and process a trustee to trustee transfer?
Permalink Submitted by Denise Appleby on Sat, 2008-08-09 00:06
Unfortunately not Dennis. Once a non-spouse beneficiary takes a distribution of the inherited amount from the inherited IRA, it’s a done deal and cannot be credited back to the IRA…unless she was the spouse of the dededent, but I think you would have said that she was (if she was) right?
Permalink Submitted by Dennis Prout on Mon, 2008-08-11 13:00
She was not the spouse, and your answer is as I expected. Since the took the lump sum, I assume all of that will be taxable to her this year?
If she leaves the money in the Roth, will that be considered an excess contribution and subject to the 6% tax on excess contributions?
Permalink Submitted by Alan Spross on Tue, 2008-08-12 00:24
Yes, it is all taxable this year. In addition she has a failed conversion which is corrected in the same manner as an excess regular contribution to a Roth IRA. It therefore needs to be distributed with allocated earnings. If done by the extended tax due date the 6% excise tax can be avoided, but the earnings will be taxable (if any) and subject to early withdrawal penalties if she is under 59.5. There is no reason to delay the correction unless she has huge gains that would make it worthwhile to incur the 6% penalty in order to avoid distribution of earnings. That is unlikely in this market.
Be sure to tell the IRA custodian that a timely correction of an excess regular Roth contribution is being made so it will be coded correctly on Form 1099R.