Proper or improper Rollover into Inhierited IRA
Mother died 10/2007 with traditional, non-ROTH IRAs at Bank A and Annuity IRA at Bank B.
Bank A created properly titled Inherited IRAs and transferred funds in for two siblings.
(Now 2008)
Bank B would not do the same.
Bank B would not accept the paperwork for trustee-to-trustee transfer to Bank A Inherited IRA account. (Paperwork did appear to be lacking necessary detail)
CPA #1 (Mother’s estate and one sibling’s) says it’s ok to take lump sum distribution checks from Bank B, written out to siblings, and transfer them (directly, signing the back of the check to Bank M) to the inherited IRA. Bank A agrees and accepts the money, co-mingling it with existing Inherited IRA funds. Another Bank C does exactly same thing for other sibling, not co-mingling, but establishing new, properly titled Inherited IRA. Financial Advisor is go between sibiling and Bank C and agrees with transaction, but mainly because the others did.
(Siblings take out MRDs as required from by Mid 2008)
Now 2009 … Bank B sends out 1099’s to both siblings with 1 Gross Distribution and 2a Taxable amount being the same (53,000) and the checkbox 2b “Tax amount not determined” NOT checked.
CPA #2 (other sibling’s) has serious concerns with this. Says we must pay income tax on the 53K or be subject to Excise tax penalty, must pull the money out of the Inherited IRAs … which means the banks A and C would have to admit to mistake, NOT call that a taxable event AGAIN, either converting to regular investor account, or???
CPA #3 (not working for or related with any of the above) says the intent of the law, not allowing a 60 day rollover like this and requiring trustee-to-trustee, is to prevent people from putting inherited IRA money into their OWN IRAs, and avoiding MRDs. And since we put them into Inherited IRAs in name of “Mother, FBO of Beneficiary”, and took MRDs, the transfer will be allowed. Agrees with CPA #1. Do not report the income, expect IRS communication, and explain situation then. But also points out that Bank A, C, and CPA #1 have Fiduciary responsibility and that siblings are not to blame.
What do we do? Simply not report the income and explain to IRS what happened, hoping for leniency? Pay taxes on it and withdraw money, which would mean getting Bank A and C to admit mistakes and changing how the money is titled (no longer IRA)?
Thanks.
John
Permalink Submitted by John Sevick on Wed, 2009-03-11 21:55
CORRECTION – Bank “M” reference is Bank A … receiving check
Permalink Submitted by Clyde Wolf on Thu, 2009-03-12 00:26
Jsevick,
The income on the 1099-R that consists of a transfer from one custodian to another custodian is reported on your 1040 line 15a.
Do not include this amount on line 15b.
Line 15b will include your RMD, and any other distributions you may have taken and held out of your Traditional IRAs.
Add a note to your tax return stating you transferred $53,000 from one IRA custodian to another IRA custodian. In May 2009 you and the IRS will receive a 5498 showing this amount coming into the receiving IRA.
Permalink Submitted by Jose Morales on Thu, 2009-03-12 21:50
This is a case where words definitely matter. The two important words being “Transfer” and “Rollover.” The two are in no way interchangable when discussing an IRA transaction in which funds from an IRA account at one financial institution are then moved to an IRA account at another financial institution.
These were “non-spouse beneficiaries” and therefore do not have the rollover option available to them. Reporting the distribution amount from the 1099R and then reporting the RMD less the rollover amount is exactly what is not allowed when a non-spouse beneficiary wishes to move funds from one financial institution to another.
The only way this should have been completed was as a non-reportable IRA to IRA transfer from the deceased person’s IRA to the beneficiary IRA. If Bank B would not process the Transfer then someone should have found out exactly why they would not process the Transfer. It sounds like there were issues with the paperwork. So the paperwork should have been corrected, or new paperwork sent.
It sounds like rather than taking the proper course of action this individual received less than great advice from CPA #1, and took a reportable distribution from the deceased person’s IRA and rolled over the funds to the beneficiary IRA. While the spirit of the law was to ensure that non-spouse beneficiaries would not put these type of funds into their own IRA, it would be pretty easy for the IRS to allow non-spouse rollovers as long as they are going to a beneficiary IRA. They chose not to allow this and have their reasons.
CPA #2 is taking a straight line view of the situation and pushing for an honest reporting of what happened. I’m not sure how Bank A or Bank C would have to admit to any mistakes on their end, but maybe I’m lost in all the detail.
CPA #3 has an interesting take but I’m not sure it’s supported by any PLRs that have come out in the past. Throwing out the term “fiduciary responsibility” is a sure fire way to get all other parties to stop being accomodating and start to cover their behinds.
Permalink Submitted by John Sevick on Fri, 2009-03-13 01:25
Thank you very much for the advice. That seems to be the consensus .. this was NOT an allowable transaction.
Regarding ..
>>>> I’m not sure how Bank A or Bank C would have to admit to any mistakes on their end, but maybe I’m lost in all the detail.
.. They accepted signed over checks, a roll-over, and put them in Inherited IRAs, which was not unallowable. Right now, I think Bank C will convert the funds to a non-IRA, egular investor account, established with funds that were already taxed.
Just seems like the banks should know more than the clients about tax and IRA law.
Permalink Submitted by Alan Spross on Fri, 2009-03-13 02:15
Seems like they should, but bank personnel sit right at the bottom of the knowledge tree when it comes to IRA custodian competency. It has been that way all along, but the current chaos in the banking industry probably make the situation worse. However, large banks still have top litigation counsel, so trying to hold them responsible for errors is difficult. I would not even try it unless the bank is clearly 100% at fault for an error. Any “contributary negligence” by the IRA owner will be used against them.
As for the IRS, there has been no leniency when it comes to the no rollover rule for non spouse inherited IRAs. This has been an error that is not possible to correct.
Permalink Submitted by Jose Morales on Fri, 2009-03-13 15:43
If the dollar figures are large enough you may want to go the PLR route. I can’t comment on any chance of success though. Or if the dollar figures are small enough you may want to try the idea floated by CPA #3. At worst you will be told by the IRS that this was not allowed and then have to pay taxes on the distributed amount plus a 6% penalty for the excess contribution.
Permalink Submitted by John Sevick on Sat, 2009-03-14 13:26
Thanks again .. what do you mean “excess contribution”?
If we call it taxable income, and the Bank changes it to a normal, non-IRA investor account established with post-tax funds, there’s no limit on how much can be invested that way,right? Do you mean if they changed it to a ROTH? It can’t remain like it is – a non-ROTH Inherited IRA subject to income tax .. .again.
Permalink Submitted by Jose Morales on Mon, 2009-03-16 16:25
Rollover of ineligible IRA distributions are considered excess accumulations/contributions. If funds were, in fact, taken from one IRA account as a distribution and then rolled over to another IRA accounts this must be reported to the IRS. It is not appropriate for the financial institution that deposited the funds into an IRA account as a rollover to simply wipe the transaction off their books and pretend it did not rollover to an IRA accounts, although this would probably make life easier for everyone involved. They may be willing to erase a rollover from their books in order to save themselves a little headache of then dealing with an excess contribution correction, but it’s not really how the IRS would like these situations handled.