Roll Bene IRA RMDs as personal IRA contributions?
I think our client got some bad tax advice and was told that they could complete 1099R form code G box 7 to distribute bene IRA funds (from a non spouse inherited IRA) and roll into their personal IRA as a contribution to avoid taxation. can someone please confirm this as valid or invalid info? thank you!
Permalink Submitted by Jose Morales on Thu, 2015-07-02 20:55
Form 1099R is issued by the plan administrator or custodian of a retirement plan. It is not a form that an individual can complete themselves. A bene RMD would be reported on a 1099R with distribution code 4 if it was from a Traditional IRA. Distribution Code G is only used for direct rollovers between employer sponsored retirement plans and IRAs. Only a spouse beneficiary can take a distribuiton from an inherited IRA and rollover the funds to their own IRA, thus avoiding taxation on the withdrawn amount.
Permalink Submitted by Alan - IRA critic on Thu, 2015-07-02 21:31
Some people will take non spouse inherited IRA distributions and use them to sudsidize an increase to their regular contributions to their own IRAs or employer plan. To be clear, this is NOT a rollover, it is just another source of cash to use for these other contributions if they are OTHERWISE eligible to make those contributions but did not have the money. Some such contributions may be deductible and would offset the taxes due on the inherited IRA distribution. Any IRA contribution requires earned income. Also, note that if an inherited IRA is drawn down by RMDs or additional distributions, and the funds sudsidize contributions to their owned accounts, the owned accounts can be converted to a Roth IRA or be stretched longer than an inherited IRA, which cannot be converted and is subject to a faster RMD schedule.