Beny IRA Transfer
Wow, I just had a client withdraw a lump sum out of her Non-Spouse Beneficiary IRA and then decide she did not need it. She then sent the actual distribution check to deposit into her current traditional IRA within the 60 days. Assuming the Non-Spouse Beneficiary IRA has already meet any other distribution requirements, is this acceptable to be able to transfer money between these two accounts this way??
Permalink Submitted by Jose Morales on Wed, 2008-09-10 22:32
Only a spouse beneficiary may take a distribution from a beneficiary IRA and roll the funds over to their own IRA. Non-spouse beneficiaries do not have this option available to them. It is generally accepted that non-spouse beneficiaries cannot even take a distribution from one beneficiary IRA account and roll the funds over to either the same or a different beneficiary IRA within 60 days.
The client can remove these funds and any earnings attributable as an excess contribution. If the client has not yet made a 2008 contribution and is eligible to do so they may leave that portion of the funds in the account and have the financial institution recode that portion of the deposit as a current year contribution.
Permalink Submitted by Dana Lundquist on Thu, 2008-09-11 00:08
Thnak you!
Permalink Submitted by Al Fry on Thu, 2008-09-11 22:09
One Cardinal rule that Ed covers in his seminars (and I cover in mine on NQ annuities): NON-SPOUSES CAN NEVER DO ROLLOVERS! Although the transfer (Trustee-to-trustee) of a QRP to an inherited IRA is called a rollover, that is a DIRECT rollover. I really wish we had less-confusing terms for these things! Al
Permalink Submitted by Dana Lundquist on Fri, 2008-09-12 02:17
Thank you AL !! I need to attend seminars!!!
Permalink Submitted by Matthew Clement on Wed, 2008-10-01 01:40
How does the IRS know whether or not the funds were first distributed to an account other than an inherited IRA?
Permalink Submitted by Alan Spross on Wed, 2008-10-01 01:55
Because any distribution other than a direct transfer willl result in a 1099R. Once a 1099R is issued, the only way to avoid taxation is to report a rollover. But these funds are not rollover eligible unless the beneficiary is a spouse.
An IRA custodian is supposed to know these rules when they set up IRA accounts whether inherited or owned. But if they inadvertantly set up an owned IRA, then the IRS would receive a 5498 that would result in a disallowed match with the 1099R issued by the original inherited IRA custodian.
Worse, the IRS is not running current in many of these situations, which means that by the time the error is brought to the taxpayer’s attention, it may be too late to correct the excess contribution in the usual fashion. The taxpayer then gets hit with a taxable distribution, interest on the late payment of the tax, and a 6% excess contribution penalty plus interest for the disallowed rollover that is not discovered in time to correct it using the timely correction procedures.
Permalink Submitted by Matthew Clement on Wed, 2008-10-01 02:23
In the scenario I’m working on right now, the beneficiary consulted his bank about the distribution. They instructed him to use his checking account information for the direct transfer from the pension.
The pension processed the direct transfer to his bank checking account, and now a month later he inquires about correcting the issue by opening an Inherited IRA and shifting the funds over.
So because it was not a distribution, no 1099R is issued. Additionally, no self-owned IRA will be set up. And yet I suspect that some way the temporary holding in his checking account will be noticed.
Can we file this as a bank error? They gave him incorrect instruction, but did not by definition process the transfer incorrectly.
Permalink Submitted by Alan Spross on Wed, 2008-10-01 03:00
But if the source was a pension account, there WILL be a 1099R. All direct rollovers from qualified plans are reported, unlike an IRA to IRA transfer. So even if the plan thinks they transferred the funds to an inherited IRA, there will be a 1099R. And there will NOT be a 5498 since the receiving account was not an IRA.
To date there is no rollover relief for distributions to non spouse beneficiaries regardless of the cause since these are categorically not eligible rollover distributions. There might be recourse potential against the bank except that banks have good defense counsel and the bigger ones are very difficult to litigate against successfully. Obviously, the amount in question and the beneficiary’s need for the funds vrs the stretch potential are important factors in determining the action contemplated here.
He may need written proof that the bank realized this was a non spouse beneficiary situation when they provided the account advice.