Spousal IRA
I have a client who passed away in January of 2020. He owed 2 traditional IRA accounts, both held at the same brokerage firm. His wife was the sole beneficiary of both accounts. She claimed ownership of each thus completing the spousal rollover. Both the husband and spouse were over the age of 72. In November of 2020, the 2 spousal IRA’s were transferred into a new traditional IRA account set up for her at the same brokerage firm. Both transfers were direct trustee to trustee.
In January of 2021. the spouse received 2 1099-R’s, one for each IRA transferred, with box 1 and box 2a completed as taxable. Box 2b was checked as taxable amount not determined. The distribution code in box 7 is a 4 for death. I spoke with the folks in the tax reporting dept of the brokerage firm, and they said that the 1099’s should be reported as rollover on the 2020 Form 1040. They would not issue a corrected 1099. In the 1099-R instructions it clearly states that a trustee to trustee transfer of one IRA to another IRA is not reported on form 1099-R.
I cannot report the IRA distributions as rolled over on the tax return to correct the issue because there was 2 transfers, may trigger an issue with the IRS for 2 rollovers within a 12 month period.
Any advice on how to handle this would be most appreciated.
Permalink Submitted by Alan - IRA critic on Thu, 2021-02-25 23:46
Election to assume ownership is done by non reportable direct transfer, but the 4 coded 1099R is telling the IRS that the surviving spouse received a distribution check. If there is no record of such a check, the 1099R is in error. The November transfer was apparently handled correctly, with no 1099R issued. This error is rare for brokerage firms, and is more likely with banks.
If this firm decided to treat the election of ownership for two accounts as a distribution, then why did they accept the second account rollover as it clearly would violate the one rollover rule. The IRS has confirmed that a spousal rollover distribution (code 4) counts against the one rollover limitation equally with a rollover from one owned IRA to another.
Unfortunately, since the firm was asked to correct the 1099 forms and refused, the spouse must file Form 4852 voiding both 1099R forms. Hopefully, the IRA statements do not report a distribution since the IRS may request documentation that the spouse never actually received a distribution. If the statements are also a problem, there at least should be no time between the closure of the decedent’s IRA and the opening of the new IRA.
Did the custodian admit that no distribution was made to the spouse? This could be a coding error sent to the tax Dept to make it look like a distribution check was issued. More often, this is where errors are made, not the tax Dept itself. If you think this is an issue, perhaps contact the custodian again, but first check the IRA statements to see what is described there. The IRS really prefers that these types of errors be resolved at the source. I doubt that the IRS currently has the time to actually contact issuers to prevent further errors like this from being repeated.
I have always been surprised by the lack of issues caused by the one rollover limitation. I think this is the first one I have heard of, but do not know if surviving spouses are simply reporting these additional rollovers and the IRS is overlooking them, or that custodians are mostly handing these transfers correctly.