1099-R 4-Death

[ILLMAS]

Can death benefits be rolled over? For example, TP mother had an IRA and a 401K, she passed away and the daughter was advised to open an IRA and 401K and rollover the death benefits to the same type of acccount it was in before, then she received a 1099-R with 4-Death (not G for rollover) and it is now being taxed, I know in any normal situtation 4-Death would be taxed, but this one is a new one to me and I am coming here for help.

Thanks

MAS

[jasdlm]

Since she is not a spousal beneficiary, she would have had to set up a beneficiary IRA rather than a rollover. This would mean that she would have to take her RMD annually. Did the money go directly to the fund company or come to her?

[ILLMAS]

I believe she did a beneficiary IRA, TP mother was already taking RMD and the money went directly to the fund company. So if this the case, then the amounts are not taxable and 1099-R have to be amended to reflect the proper code?

Thanks

MAS

[jasdlm]

If it was a trustee to trustee transfer, I believe that the 1099R is wrong. However, were beneficiary IRA's established? If not, and if the IRA is set up in just daughter's name, I believe you will have to correct that and include the name of the decedent in the registration. Daughter did not commingle any of the inherited money with her own, existing IRA, correct?

[Lynn EA USTCP in Louisiana]

In ATX there's a way to reflect the box 2 taxable amount as a rollover, without having to get a corrected 1099-R. Look at the options on box 2 of the 1099-R input page.

[joanmcq]

Look at the statement. Don't guess as to whether she did a beneficiary IRA, the statement should be titled somewhat like:

Jane Doe, FBO

John Doe, deceased.

If it's not, she took the whole thing as a distribution, and has over contribution issues to deal with too.

[ILLMAS]

I am sure glad I asked, from everyone response, I did further researched and found this from the IRS website:

Inherited from someone other than spouse. If the inherited traditional IRA is from anyone other than a deceased spouse, the beneficiary cannot treat it as his or her own. This means that the beneficiary cannot make any contributions to the IRA or roll over any amounts into or out of the inherited IRA. However, the beneficiary can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary.

MAS

[Jack from Ohio]

I am sure glad I asked, from everyone response, I did further researched and found this from the IRS website:

Inherited from someone other than spouse. If the inherited traditional IRA is from anyone other than a deceased spouse, the beneficiary cannot treat it as his or her own. This means that the beneficiary cannot make any contributions to the IRA or roll over any amounts into or out of the inherited IRA. However, the beneficiary can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary.

MAS

You nailed the exact answer!

[joanmcq]

I have a bene IRA. Trust me, I know these rules backwards & forwards!

[ILLMAS]

Thank you, the return is going on extension, TP has to do some investigating on her own.

[ILLMAS]

Help again, I think TP, financial advisor and issuer of 1099-R are confused and causing me more confusion. I mentioned to the TP that 1099-R issuer fail to name the custionan/trustee XXXX, FOB or deceased, they simply made the 1099-R to TP name, then she tells me that she had nothing to do with it, it was her sister who administers the trust. TP sister simply handed over a check made out to TP name and went to see personal financial advisor and open IRA accounts like if it was a rollover. I advised TP to call the 1099-R issuer and request for them to be changed, issuer told TP that if she open the account like she was supposed to, she can prove it to the IRS when receives Form 5498 in May 2014.

This is what I see didn't happened:

Request a trustee-to-trustee transfer. Make sure that any assets transfer directly from one account to another or from one IRA custodian to another. There is no option for a 60-day rollover when inheriting IRA assets. If you receive a check, the money will be taxed as ordinary income, and is ineligible to be deposited into an inherited IRA you may own at another firm, or back into the inherited IRA that it was withdrawn from to begin with.

This what TP, financial advisor and 1099-R issuer says happened:

Tax Reporting: Form 1099-R Reporting IRA Rollovers

A rollover occurs when money is distributed from one tax-deferred account and deposited within 60 days to another tax deferred account. There are two types of IRA rollovers: 1) a direct rollover, which occurs when funds are transferred directly from one account to another account by the account custodians/trustees, and 2) a distribution, which is made directly to you and within 60 days you deposit the full amount (including any taxes withheld) into a new IRA or other tax deferred account. The custodian/trustee distributing the funds will issue you a 1099-R reporting the payment/transfer of funds. The code in Box 7 indicates what type of payment was made. The custodian/ trustee receiving the IRA funds will issue a Form 5498 in May reporting the contribution to the receiving IRA account which reports to the IRS that you deposited the money into another IRA.

Its not a question of who is right or wrong, but for those that know how this work what is the correct way to report to the IRS?

Thanks

MAS

[Jack from Ohio]

Financial advisors are tax illiterate and dangerous to the tax situation of their clients. I am being kind with the work illiterate.

MAS, she will have to treat it as a taxable distribution. On the 1099R input screen, put in everything in exactly as the 1099R EXCEPT, make the taxable amount $0 and put the total amount rolled over in the box for rollover amount. Do NOT change box 7.

She will get a CP2000 and will need the following items to send in response:

1. Copy of the statement showing the date the funds were disbursed from the original account.
2. Copy of the statement from the account she opened showing the date and amount that was deposited and that the account was a qualified account.
3. The amounts must match exactly.

Dates and amounts are critical, and must be less than 60 days apart.

The financial advisor should pay for all the extra cost involved since he gave his client bad information. Trust me on this. I have done this for over 20 people in the last two tax years.

[jasdlm]

If she actually received a check, she cannot roll it over. She is going to have to pay tax on the distribution. IF the money did go trustee to trustee, and the account simply isn't titled correctly, you can correct the error (to add the name of the deceased to the IRA titling) and you will have to be prepared to respond to the CP 2000.

Code Section 408(d)(3)© prohibits rollover treatment for an inherited IRA, so if she took a distribution (i.e. received the check directly) she's out of luck. This HAS to happen by trustee to trustee transfer. NO 60 day rollover time period allowed. There has been a tax Court case on this and the taxpayer lost. If, as you state in your post, the check was made payable to the taxpayer, I would not treat it as a rollover. I do not think you will be successful in arguing your way out of the assessment when you receive the CP2000.

http://www.ustaxcourt.gov/inophistoric/beechsummary.sum.wpd.pdf

[jklcpa]

I agree with jasdlm on this one. MAS, you didn't say how much the distribution was, but since it wasn't a direct trustee-to-trustee transfer, then what she really has is a taxable distribution and a contribution into an IRA caused by an improper rollover, and she could possibly even have an excess contribution that is subject to the 6% penalty.

[ILLMAS]

Under $35K

[joanmcq]

She's screwed with a rollover, opening a bene IRA at this point. It's all taxable, and she has to get it out of the IRA before April 15.

I wouldn't blame the financial advisor, he or she just did what they were told; it's a rollover. They don't know it was inherited.

[Mary]

I have a client who just inherited an IRA. Grandma started to receive MRD two years ago, died in May,2015. Grandson just received a statement from a financial advisor with grandson's name(BENE) and grandma's name(DECD) for this IRA. If grandson take the whole amount out, he would have to pay taxes, but no 10%penalty. But he is required to take MRD every year if he keeps the money in this account. Am I correct?

[jklcpa]

I have a client who just inherited an IRA. Grandma started to receive MRD two years ago, died in May,2015. Grandson just received a statement from a financial advisor with grandson's name(BENE) and grandma's name(DECD) for this IRA. If grandson take the whole amount out, he would have to pay taxes, but no 10%penalty. But he is required to take MRD every year if he keeps the money in this account. Am I correct?

Yes.  The first RMD he is required to take will be in 2016, the year following the year of grandma's death. If he only wants to take the minimum out, he will use is life expectancy from the single life expectancy table for the 2016 year, and then subtract 1 year from that number for the subsequent year distributions and not go back to the table each year.  There is no 10% early withdraw penalty for him because he is required to take these distributions, no matter his age.  If he doesn't take enough of a distribution in any year to meet the RMD requirement, he is subject to the penalty that is 50% of the shortfall though.

[easytax]

Yes.  The first RMD he is required to take will be in 2016, the year following the year of grandma's death. If he only wants to take the minimum out, he will use is life expectancy from the single life expectancy table for the 2016 year, and then subtract 1 year from that number for the subsequent year distributions and not go back to the table each year.  There is no 10% early withdraw penalty for him because he is required to take these distributions, no matter his age.  If he doesn't take enough of a distribution in any year to meet the RMD requirement, he is subject to the penalty that is 50% of the shortfall though.

As I am NOT fully up on this ---- Rational seems correct  BUT  if Gran took 2015 RMD - all is well /// if gram did not, since it is inherited, would the ben not have to take the 2015 RMD or be subject to the 50% penalty ------- or possible would the RMD for 2015 be subject and required to grams estate and the estate might be subject to the RMD 50% penalty for the RMD not taken for 2015?

 

[jklcpa]

As I am NOT fully up on this ---- Rational seems correct  BUT  if Gran took 2015 RMD - all is well /// if gram did not, since it is inherited, would the ben not have to take the 2015 RMD or be subject to the 50% penalty ------- or possible would the RMD for 2015 be subject and required to grams estate and the estate might be subject to the RMD 50% penalty for the RMD not taken for 2015?

 

Yes, you are correct.

If the deceased IRA owner had reached the required beginning date to start distributions and was required to take a distribution for 2015:

• if the deceased grandma HAD taken IRA distributions that were enough to satisfy her 2015 RMD, then the beneficiary distributions would begin in 2016 as I described in my earlier post.
• if the deceased grandma was required to take an RMD for 2015 and HAD NOT done so, either because she usually took it later in each year, or the pay frequency was such that she hadn't met the minimum amount yet for the year, then the beneficiary is required to take a distribution in the year of death so that the deceased IRA owner's RMD is satisfied.  This distribution is paid to the beneficiary, and is taxable to the beneficiary that receives the RMD, not the estate.  If the beneficiary fails to take enough in 2015 so that grandma's RMD isn't met, then the beneficiary is subject to the 50% penalty on the shortfall.