Spousal rollover

Submitted by Joy Soulier on Tue, 2021-03-16 15:20

Decedent died several years ago when spouse was under 59 1/2. His IRA was set up as inherited for her benefit in case she wanted to take distributions. She never did so. She rolled this over to her own IRA in 2020 and the custodian has generated a 1099-R showing a distribution with a code 4 for death. The custodian transferred the funds into her IRA and told her it was fine to do so. Everything can be traced. Is the 1099-R incorrect? We have requested that they revise the 1099 to reflect a rollover but it is not clear they will do so.



Submitted by Alan - IRA critic on Tue, 2021-03-16 18:10

There should have been no 1099R if the transfer was made without sending a check to the spouse. The request to the custodian should not have been to revise the 1099R to reflect a rollover, it should be corrected to show 0 so a rollover would not have to be reported. Reporting a rollover could be a disaster if she had already used up her one permitted rollover in the last 12 months, or it will lock her out of another rollover for the next 12 months. This rollover issue became more of an issue when the IRS changed their one rollover rule in 2015 to apply to all IRAs of a taxpayer, and they also ruled that a 1099R coded 4 counts as a rollover in a spousal rollover situation as well. But if there was no actual distribution paid to the spouse, the 1099R is improper. If the custodian refuses, the 1099R will have to be reported as a distribution and rollover on Form 1040 and then she will have to avoid 60 day rollovers for the month period following the 2020 transaction. Perhaps the request for a corrected 1099R will take on more weight if the one rollover rule is mentioned. If she does NOT have a permitted rollover, please advise.

Submitted by Joy Soulier on Tue, 2021-03-16 18:20

Thank you.  My main worry is that the setting up of the account as an inherited IRA in husband’s name for her benefit might have eliminated her ability to roll it over.  I did not think so.  So the taxable box of the distribution should have been reported as zero?

Submitted by David Mertz on Tue, 2021-03-16 18:39

If a distribution was made payable to her, resulting in her having had constructive receipt of the funds, the reporting on the Form 1099-R is correct and the distribution will have to be reported on Form 1040 as having been rolled over.  However, if this was performed as a trustee-to-trustee transfer, there should have been no Form 1099-R at all and the Form 1099-R needs to be corrected to show $0 in both boxes 1 and 2a.  A trustee-to-trustee transfer is neither a distribution nor a rollover.
In some cases an IRA custodian might require that the existing inherited IRA be retitled in the name of the surviving spouse before performing a trustee-to-trustee transfer, but this would still be nonreportable, not a distribution and rollover because the spouse never has constructive receipt of the funds.

Submitted by Alan - IRA critic on Tue, 2021-03-16 18:48

Maintaining an inherited IRA by a surviving spouse never limits the spousal rollover at any point in the future. In fact, failing to take an RMD from the beneficiary account automatically defaults that account into ownership status. Box 2a of the 1099R must show the same amount as Box 1,  but the 2a figure becomes irrelevant if a rollover is reported on Form 1040, line 4. But there should never have been a 1099R issued in the first place, since that forces the spouse to report a distribution and rollover when there was no distribution, and can become very costly if a rollover had already been done in the prior 12 months.
I suggest asking the custodian to issue a corrected 1099R showing 0 (effectively rescinding the first1099R). If they refuse, then caution the spouse to avoid doing another rollover until 12 months have passed from the subject transaction. Also tell the spouse to always move money by direct transfer to avoid a 1099R in the future. Has she filed her 2020 return yet?

Submitted by Joy Soulier on Wed, 2021-03-17 17:21

Now it appears that she transferred funds from a 401k directly to her IRA.  This was trustee to trustee but was reported on a 1099-R.  This was done with the 12 months preceeding the transfer of the inherited IRA.  I don’t believe this will be an issue because the once per year limt on IRA rollovers does not apply to eligible rollover distributions from a qualified plan.  Is this correct?  If not, then we really need to get the custodian to fix the 1099-r on the inherited IRA.  That transfer was also trustee to trustee but they are making an issue of the titling.

Submitted by Alan - IRA critic on Wed, 2021-03-17 19:01

Correct, a rollover between an IRA and qualified plan (either direction) does not count for purposes of the one rollover limitation. However, the improper 1099R issued for the inherited IRA to owned IRA direct transfer will lock her out of any 60 day rollover for 12 months. Without that 1099R being corrected she would need to be very careful to avoid any additional rollovers during that period.

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