Mischaracterized Beneficiary IRA
I have a prospect in her 30s who had a 15k rollover IRA in 2007. In 2007 her mother passed away and had my prospect named as the beneficiary of her 401k plan. This 60k of inherited money from mom was incorrectly comingled with daughter’s existing 15k rollover IRA. Daughter now has 100k or so in that rollover IRA account. What are the ramifications of the comingled money? What is the process for trying to fix the problem? I understand there should be two separate accounts (one rollover IRA and one beneficiary IRA), but how do we decide what’s in each? Is there interest to go along with the missed RMD’s? What would be her potential repurcussions if she didn’t do anything?
Thanks.
Permalink Submitted by Denise Appleby on Thu, 2012-05-10 13:18
[quote=”[email protected]“]I have a prospect in her 30s who had a 15k rollover IRA in 2007. In 2007 her mother passed away and had my prospect named as the beneficiary of her 401k plan. This 60k of inherited money from mom was incorrectly comingled with daughter’s existing 15k rollover IRA. Daughter now has 100k or so in that rollover IRA account. What are the ramifications of the comingled money? What is the process for trying to fix the problem? I understand there should be two separate accounts (one rollover IRA and one beneficiary IRA), but how do we decide what’s in each? Is there interest to go along with the missed RMD’s? What would be her potential repurcussions if she didn’t do anything?
Thanks.[/quote]
Technically, this was an ineligible rollover which means that (1) the amount should be have treated as ordinary income for 2007. There would be no RMD after that. (2) The amount created an excess IRA contribution that accrued a 6% excise tax or every year it remained in the IRA starting with 2008, and (3) she might be required to pay income tax on the amount twice.
Nontechincally speaking, whether it can be fixed and avoid one of all of the above (1 through 3) depends on the facts and circumstances, including how the error occurred. One of the first steps would be to talk with the IRA custodian and review all the paperwork that was completed for the rollover. The paperwork she completed for the 401(k) plan, as well as the disclosures that the plan provided to her should be reviewed as well. In most cases, the error would be attributed to her, as she is [i]technically [/i]responsible for ensuring that the rollover to her traditional IRA meets the requirements to be an ‘eligible rollover’.
Good luck
Permalink Submitted by Ryan Smith on Fri, 2012-10-12 12:36
The update to this situation is the custodian is saying there is nothing they can do because the 2 accounts (IRA and what should have been a rollover IRA) were co-mingled and the client signed the rollover paperwork back in 2007 even though she really didn’t understand what she was doing (and obviously neither did the representative). The custodian then stated she needs to write a letter to the IRS to get a Private Letter Ruling before the account can be re-coded or split. What is involved in this process? I can’t imagine it’s ever cost effective to communicate with the IRA especially when it comes to a Private Letter Ruling?
Also, the way I see it, this person has two options: take the $100,000 or so now out of the Rollover IRA account and pay taxes and a 10% penalty or keep the money coded as an IRA and hope it never gets caught? Neither of which seem like a sold option.
Thanks.
Permalink Submitted by Jose Morales on Fri, 2012-10-12 16:26
If the client does decide to try for a favorable Private Letter Ruling, I would not suggest that they do this on their own. This is something that you would want a lawyer to draft for you after they have reviewed the facts and circumstances related to what occurred. Denise did a very good job of covering what this client’s options are now at this point.