Nonspouse Inherited IRA Beneficiary
I’m completing a 2009 Form 1040 for a client. A 1099-R was issued to the wife for the entire balance from her deceased’s father’s IRA. When I requested additional info, she provided a copy of a check from the father’s custodian paid directly to her, plus her personal check dated a few days later to a new custodian. The new account is titled “PTC Cust Beneficiary IRA FBO Client B/O Deceased.”
Before contacting the broker on the second transaction and/or advising the client the entire distribution is taxable in 2009, thought I’d better make sure I am correct on this. Seems to me the distribution was not eligible for rollover and should have been a trustee-to-trustee transfer instead. Am I right?
Also, I don’t believe there are penalties, excise tax, etc. for 2009 or 2010. The new account simply needs to be retitled as the wife’s taxable account. Am I right about this as well?
Permalink Submitted by Alan Spross on Tue, 2011-11-22 18:30
You are correct. Trying to do a 60 day rollover for a non spouse inherited IRA is the most costly and frequent error made because there is no corrective measure available to fix it. The distribution is taxable per the 1099R. There are no early withdrawal penalties since this was a death benefit. A TtoT transfer is the only way to move funds to a new custodian in this situation.
You are also correct about re titling the present account as a taxable account. Any securities will have a cost basis equal to their value on the date of distribution as reflected on the 1099R (without a breakdown). The present custodian should have known better than to set up an inherited IRA account under the circumstances.
Permalink Submitted by Peter Lingane on Tue, 2011-11-22 20:36
Why was the improper transfer to the inherited IRA not an excess contribution, triggering the excise tax? Because there can be no contributions to an inherited IRA?
Permalink Submitted by Alan Spross on Wed, 2011-11-23 02:29
Good point. The 6% excise tax may well be part of the IRS required solution.
There is no recommended procedure for all the corrective actions that need to be taken to correct this, probably because this situation is extremely rare since the IRA custodians should know that there is no allowed rollover or regular contribution allowed to an inherited IRA. In this case the custodian overlooked this. Nonetheless, the distribution of funds from the new inherited IRA will generate a 1099R in the current year, leaving the client with two 1099R forms for different years that include mostly the same income. Client will have to report the 2009 1099R income in 2009, probably include a 5329 for the 6% excise tax including the possibility of credits against that tax for allowed regular contributions or other IRA distributions, and the same for 2010. The account should be drained before the end of this year to avoid a 3rd year of excise taxes, and any amount received in excess of the original contribution (ie gains) will be taxable in 2011 and if there are gains a 10% penalty on the gains. Also, a final 5329 for 2011. Then, a special statement will have to be made to the IRS explaining what happened and that the improperly rolled funds were taxed in 2009 to prevent double taxation.
Probably the only situation justifying a letter ruling here would be if there was evidence the client intended to open a taxable account rather than an inherited IRA, and that seems highly unlikely.
The IRA custodian will have to fully distribute the so called inherited IRA, and the funds that remain should go into a new or different taxable account, perhaps at a different institution.
Permalink Submitted by Sherry Cadenhead on Wed, 2011-11-23 17:43
I understand Peter’s thinking. And, I would totally agree with him to the extent of any contributions exceeding the amount withdrawn from the original IRA. In this case wasn’t the new account simply set up improperly? Is that a stretch?
Permalink Submitted by Alan Spross on Wed, 2011-11-23 19:57
Maybe not if it can be proven to be the total fault of the custodian and not what the client intended, but client still has an obligation to verify the paperwork. The distribution error happens all the time, but most custodians will not accept a rollover contribution to an IRA titled in this manner.