Decedent’s IRA Transfer to Bene IRA
We’re advising a client who received an IRA distribution check from a relative’s account, which was made payable directly to them. Then, a different custodian deposited this check into a Bene IRA on behalf of our client. Does this action conflict with the regulations regarding indirect transfers into Beneficiary IRAs. Is this deposit considered permissible, given that it originated as an IRA distribution made out to the individual before being deposited into the Bene IRA?
If this deposit isn’t permissible, is there any best practice on getting the funds out of the Bene IRA? It has some gains since the initial deposit late last year.
Permalink Submitted by Alan - IRA critic on Wed, 2024-04-03 21:08
You are correct that the distribution paid to the beneficiary is not eligible for rollover. Funds can only be moved to a non spouse inherited IRA by direct non reportable transfer. This distribution will be reportable on a 1099R and the beneficiary will have to report the taxable income according to the 1099R. It was from an inherited IRA, so there will be no penalty.
The additional issue is that the deposit must be treated as an excess contribution to the beneficiary IRA, that must be removed with an adjustment for earnings. The beneficiary IRA Custodian should have known that a contribution from a check made out to the beneficiary or by the beneficiary was not an eligible contribution and they should not have accepted it. But because they did, they need to understand that they need to make a corrective distribution as if the deposit was a regular IRA contribution. The 1099R should only show a taxable amount in Box 2a if there were gains on the contribution before the corrective distribution.
Permalink Submitted by brcwm on Wed, 2024-04-03 21:19
Thank you!
Ps, welcome back. We missed you.