1099-R on inherited IRA
HI all,
I’ve gotten inside my own head, and now I feel I’m overthinking a rather simple situation. Mom died in 2020. Daughter is the beneficiary of her IRA. Daughter opened an inherited IRA and moved the entire account balance via direct transfer. No RMD was taken by Mom (while alive), nor by Daughter prior to transfer as this occurred during a waiver year.
Simple question: What should the 1099-R look like? Should there even BE a 1099-R?
Custodian originally sent an IRA that showed full transfer amount in box 1. Box 2a also showed the same amount as being taxable. Box 7 showed code 4 (death), and the IRA box was checked. Clearly that wasn’t correct. The custodian then sent another 1099-R that was NOT marked “corrected”, but had $0.00 in box 1 and 2a. Box 7 still coded 4.
Please set my brain straight. Thanks,
Permalink Submitted by Alan - IRA critic on Wed, 2021-06-23 14:18
There was no distribution and therefore there should be no 1099R. Sounds like custodian realized they made an error and then made a lame attempt to issue a corrected 1099R. The IRS may not see this as cancelling out the first 1099R, and the first 1099R will probably result in a tax due notice. Therefore, custodian should reissue a properly corrected 1099R for the first one. The second 1099R can just be ignored, but if the custodian refuses to make another proper correction daughter should keep the second 1099R so she can refer to it if the IRS sends a tax due Notice. She should also keep the paperwork for the transfer as documentation that there was no actual distribution. If her 2020 return has not yet been filed, she should probably report the first 1099R as income and then back it out with an equal negative figure and an explanatory statement. That will tell the IRS that the first one was not ignored, but was incorrect, and this will hopefully prevent any tax due notice from going out. The new inherited IRA custodian should not issue a 5498 showing a rollover contribution since they received a direct transfer.
RMD is not an issue for the year of death since all 2020 RMDs were waived by the CARES Act.