Inherited IRA distribution
My client received two distributions from her late mother’s IRA, deposited the checks into her checking account (Feb. 2017), then wrote one check to me which I deposited into an individual account in her name, not realizing the money was qualified funds. My client received tax notice from IRS in June 2019 asking for the payment of taxes on this distribution. It was never my client’s intent to take the money lump sum from her mother’s IRA but rather stretch it over her lifetime. What is my recourse in this matter based upon your experience with matters of this type, this is my first. I’ve heard of asking for Private Letter Ruling but did not know if this is the best or cheapest way to go. Thanks for all your feedback!
Permalink Submitted by Alan - IRA critic on Fri, 2020-03-06 20:33
Unfortunately, there isn’t any recourse. Once a distribution to the beneficiary is made from a non spouse inherited account, it is irrevocably taxable. For years, this has been the greatest pitfall regarding inherited accounts. In fact, I can only recall one successful PLR that allowed a rollover and that was for a mentally disabled beneficiary whose conservator requested the distribution intending to do a rollover. One recent proposal in Congress was to change the code to allow a 60 day rollover from these accounts, but since this provision was never made part of the Secure Act, and the Secure Act is funded by reducing stretch periods, prospects for relief in this area are not good. Strangely enough, IRA custodians are not warning beneficiaries about this pitfall, so there are plenty of them who fall victim to this rule. Perhaps if the client is still working, she can use this money to subsidize increased contributions to her own retirement plans. Pre tax contributions would recover some of this tax loss, but it will take time.