Hardship and 60 day rule with Inherited IRA
I have a client who was the beneficiary of a CalPERS qualified retirement plan from her mother who died a little less than three years ago. This was amongst several other qualified retirement plans the client inherited from her mother.
We arranged for the rollover to an inherited IRA of the other non-CalPERS plans. We met with her last week and she casually mentioned that she received a distribution check from this plan but that she never deposited it into the Rollover IRA (we would have been on her about this but were not aware of this CalPERS plan).
I believe she received this check over a year ago and is now lost; she asked CalPERS to cancel it. They are in the process of issuing a new one. The whole crux of this matter is that the client has been sick with serious and debilitating disease that left her more or less bed bound since her mother died.
So, two questions:
1. Can she just say that she never received the check and therefore not pay taxes on the distribution? It is her intent and desire to roll this over into an inherited IRA (from which she has been taking her RMDs from since the year after her mother died). I.E, was the fact the check issued mean that she has taken possession of it? It was never deposited.
2. If she cannot claim ignorance how difficult is it to claim hardship on all of this and that any penalty (the client just turned 40) or income tax owed on it should be waived and that she can effectively roll it over into her inherited IRA?
Thank you for your guidance
Permalink Submitted by Alan - IRA critic on Tue, 2014-09-02 17:49
Was the lost check payable to an IRA custodian for her benefit or was it made out directly to her? If the former, the check can be replaced and the direct rollover completed. If the latter, there is never a way to indirectly roll over a distribution to a non spouse beneficiary, and that distribution would have been irrevocably taxable when issued. The check can be replaced, but it is still taxable in the year issued. Hopefully, a distribution (check made out to her) was not requested as there is no IRS authority to undo that. If CALPERS messed up, there might be a way to hold them responsible.
Permalink Submitted by David Lawrence on Tue, 2014-09-02 18:45
Yes, the check was made payable to the IRA custodian. So, if I read your response, she will not have to pay taxes on this (because it will be deemed to be a direct rollover) and she will not have to file a hardship claim, etc Is that correct? And thank you for the quick response. It is very much appreciated.
Permalink Submitted by Alan - IRA critic on Tue, 2014-09-02 19:46
No tax bill if she can get the check replaced and rollover accepted (stop pay and reissue), but there is still work to do. The reissued check will probably be dated currently and the 1099R she should have for 2013 will not be re issued. While if reported as a direct tax free rollover on 2013 return due to 2013 1099R, there would be no 2013 taxes, but the IRA Custodian will issue a 5498 reporting the rollover contribution in 2014, so the 5498 and 1099R will not match in the IRS computers because the years are different. This could cause an IRS inquiry down the road that will have to be addressed at that time. What did she report on her 2013 return for this 1099R, or has the return been extended?