Beneficiary of my Fathers IRA to Inherited IRA

Submitted by Judy Dunn on Wed, 2017-12-13 20:56

Hello,

My father left me as his beneficiary of his IRA that was being managed by a community bank. When I closed out his accounts I received cashiers check in my name for the full balance since I was clueless about any options. The distribution was without tax withholding.

Since then, I’ve learned that it’s better to roll his IRA into an inherited IRA and this can be done by retitling an IRA properly.

I’ve contacted the bank several times to ask about doing this but cannot get a straight answer on what can be done.

Can I open a new IRA with proper retitling and then deposit the full cashiers check without any issues with the IRS, taxes, etc. ?

Thanks for your advice. Judy



Submitted by Alan - IRA critic on Wed, 2017-12-13 21:14

  • Judy, unfortunately you cannot do a rollover with a non spouse inherited IRA and there is no way around this if you receive a check made out to you personally. You can only transfer to another inherited IRA account by a direct trustee to trustee transfer, which is not considered a distribution. You will get a 1099R coded 4 (death benefit) in January and will have to report it on your 1040 as taxable income.
  • If you are working and not maxing out your workplace plan, you could use this distribution to subsidize increased contributions, although it is probably too late to do this for 2017. You can also use the money to subsidize a regular IRA contribution up to 4/16 for 2017, but I don’t know if you qualify for a deduction of that contribution. Any pre tax contributions you can make to your own plans will help offset the taxes due on this IRA distribution.
  • If the balance was large, you may need to make an estimated tax payment by Jan 16th in order to avoid an underpayment penalty. Penalty depends on how much you have paid in for 2017 in relation to last year’s tax liability.

Submitted by Judy Dunn on Thu, 2017-12-14 02:10

 Alan, Thanks for the quick response.  I have maxed out my current plan and I would have to make an estimated tax payment that I am trying very hard to avoid. Have you heard of a bank reverse the transaction by canceling/returning the check and having the bank process a descendent/inherited IRA? or having the paperwork revised to reflect rollover instead and then open a new IRA retitled and depositing the check directly?When I talked to the bank today, I was told the 1099 R has my fathers name and SS# and that the impact would hit his tax return but do not believe that. They are emailing me a copy of this document but I have yet to receive.Thanks again. Judy

Submitted by Alan - IRA critic on Thu, 2017-12-14 02:27

  • This bank does not seem to have a clue regarding inherited IRA rules. First, they failed to warn you that the distribution check would not be eligible for rollover. Then they were not able to directly answer your questions regarding these matters. Now they indicate that the check will be reported under your father’s SSN?  It must be reported under the tax ID of the recipient, which is you so they will need your SSN for the 1099R. 
  • There is only one situation where the IRS has ever approved a rollover of a non spouse distributions and it was for a disabled minor whose inherited IRA was mishandled by his caretaker. So there is no chance for relief from the IRS. As for the bank, the only hope there is if the bank mishandled your request and you never asked for a distribution. However, even though the chance is very slim, there is nothing lost by trying to get them to accept the check back and re deposit it to the account. And the window for that will be closed 12/31 which is the date for which they must report the year end inherited IRA value to the IRS. So if you are going to try this, do it right now. Of course, there is also the risk that they will drag their feet and you will not have access to the funds for awhile. A bank will ordinarily only consider taking the check back and cancelling the distribution IF they are totally at fault, so unless you can make a case of that being true, I would not pursue this.

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