inherited ira

Submitted by Michael Handzo on Thu, 2019-09-19 18:37

hi, i have a client that had an inherited ira at another firm and we submitted paperwork in 2017 to do a direct transfer to an inherited ira with us, they also required their own paperwork to process and a check was sent to us and deposited and coded as a direct transfer. the client received a 1099r from the other firm and recently received a letter from the IRS about. I guess it’s looked at like a rollover and from what I understand it should’ve been a direct transfer. any advice on this situation and how to handle? The 1099r had a 4G code and a 0 taxable amount in box 2a.

Thank you



Submitted by David Mertz on Thu, 2019-09-19 20:11

  • Codes 4 and G together indicate that either this was a direct rollover from a qualified retirement plan, say, a 401(k), indicated by *not* having the IRA/SEP/SIMPLE box marked on the Form 1099-R, or that it was an IRA and the IRA custodian is ignorant of the fact code G is only used for rollovers to or from a qualified retirement plan and that trustee-to-transfers are not reportable.  Codes 4 and G can never be used together on a Form 1099-R that has the IRA/SEP/SIMPLE box marked.
  • If this was a direct rollover from a qualified retirement plan, which is perhaps the more likely scenario, the gross amount of distribution was required to be reported on the recipient’s tax return (line 16a of Form 1040 or line 12a of Form 1040A), and the deposit into the inherited IRA account should have been coded as a rollover contribution and reported as such on Form 5498.  The Form 5498 showing the rollover contribution would substantiate to the IRS that the direct rollover was completed.
  • If this was actually a trustee-to-trustee transfer of an inherited IRA, ideally the original IRA custodian should issue a corrected Form 1099-R showing $0 in box 1 to indicate that no distribution occurred, but the IRS might accept just an explanation that the Form 1099-R was issued incorrectly.

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