Inherited IRA rolled over to a 401(k)
My friend received an inherited IRA from his aunt in 2009 and rolled it over to a 401(k) along with his own IRA. Both amounts were received in separate checks and sent to the 401(k). He just received a notice from IRS showing that he failed to report the inherited IRA. The issue is the withdrawal of the money now in 2012 since he should never have been allowed to roll over the amount in the first place. The 401(k) will issue a 1099R with the withdrawn amount. Can we use any special language to request the return of the original rollover?
Permalink Submitted by Alan Spross on Fri, 2012-06-08 23:45
Well, that was an expensive error. Not only expensive but a hassle to report and avoid double taxation.
Usually this error is made by rolling to an IRA, and a qualified plan may have their own issues with DOL mandated corrective procedures that should be contained in EPCRS guidelines.
I have not seen any recommended template to unwind this, but suggest a detailed letter to the 401k plan asking them to return the amount of the inherited portion +/- calculated earnings and without 20% withholding because the distribution is not rollover eligible. Obviously, the earnings would be subject to tax and penalty but the 1099R from the plan will show the entire distribution as taxable.
His 1040 for the year of the plan 1099R should show the total distribution on line 16a and only the earnings on 16b. Enter see “letter of explanation” next to 16b. Include with the return a copy of the IRS correspondence and amended return showing the inherited IRA distribution being reported and state that the excess rollover to the 401k plan should not be taxed a second time. This is an extremely rare situation and may require additional nerve wracking correspondence with the IRS to make them understand what happened. This recommendation may need to be tweaked depending on what action the plan actually takes to address the problem and it might take the plan awhile to consult with their administrators before they distribute the inherited portion.