Re-titling Traditional IRA to Inherited Traditional IRA

Submitted by Robert Roselli on Thu, 2019-07-18 14:28

I was advised to set up money coming from a Pension fund as a Traditional IRA. It should have an Inherited Traditional IRA.
Questions are what steps are needed to correct it? Are there any tax ramifications?

Thanks



Submitted by Alan - IRA critic on Thu, 2019-07-18 15:09

Was this a newly opened IRA?  If so, showing evidence that the pension was inherited should allow the custodian to re title the IRA as an inherited IRA.  Was this a direct rollover and how was the check made out?



Submitted by Robert Roselli on Thu, 2019-07-18 15:27

This was opened in July 2018 as a Traditional IRA. The check was payable to the Mutual Fund company FBO the beneficiary. One person over there told me to submit an Inherited IRA applicaiton along with a letter of instruction.



Submitted by Alan - IRA critic on Thu, 2019-07-18 15:39

You could do the LOI. Not clear whether “FBO the beneficiary” shows the client as the beneficiary or just client’s name. In other words, if the direct rollover check did not indicate that it was payable to a beneficiary IRA, having the account retitled may be more challenging. A whole year passing is not helpful either. Has there been any tranasactions in this IRA since it was opened?  The IRA custodian could either open a new account and transfer the balance or actually retitle the current IRA as inherited. Problem is that they have already issues a Form 5498 to the IRS showing a 12/31/2019 balance in an owned IRA and a rollover contribution for 2019, so they would also have to issue a corrected 5498. Client should be sure to request copies if corrected 5498 forms as needed.



Submitted by Robert Roselli on Thu, 2019-07-18 15:50

The check was made payable to the fund company FBO the client. It was made out as a Traditional IRA. I just did another rollover for her brother where we specified in the check that was an Inherited IRA. The one is question was not made payable to an Inherited IRA. The account was funded on 08/13/18, and on 08/24/18 the client took 3,000 out. The money was invested in a money market so at least we don’t have to worry about market fluctiations. I think only 2018 will need a new form 5498. What are the tax ramifications if any?



Submitted by Alan - IRA critic on Thu, 2019-07-18 16:21

Sounds like many parties made errors since the direct rollover check was incorrect. The pension fund had to know that client was a beneficiary when they issued their direct rollover check. For 2018, client should have a 1099R from the pension coded G4. Also a 1099R from the IRA custodian for the 3000 distribution. That 1099R was probably coded 1 or 7, but would not have the 4 code indicating a beneficiary distribution. IRA custodian should revise that 1099R adding code 4. While these revisions complicate the situation, the more important issue is getting the IRA custodian to re title the account ASAP. Apparently they are willing to work with client, which is fortunate, and hopefully they will not change their mind when they figure out the revisions they will need to make since the incorrect forms have already been filed. Has client filed 2018 1040?



Submitted by Robert Roselli on Thu, 2019-07-18 17:28

I was the advisor on this case. Myself and the client were on the phone with the Plan Administrator who was VERY adament that it was a Traditional IRA not an Inherited IRA. When my client got her taxes done for 2018, this is when it was raised. It sounds like after they re-title it, all the fund company needs to do is revise the 1099R with the 4 code. They mentioned the client needs to sign an idemnity letter which will absolve them of any blame. The blame lies with me and plan admin over at the pensions fund. If we get this re-titled and the 1099 revised, it sounds like a non-taxable event?



Submitted by Alan - IRA critic on Thu, 2019-07-18 17:51

Yes, that should resolve the issue. There is always a chance for questions from the IRS, but that is quite unlikely. Any additional distributions should obviously be avoided until it is verified that the IRA has been retitled, transferred to a new inherited IRA or however the custodian chooses to handle this. 



Submitted by Robert Roselli on Thu, 2019-07-18 17:58

1) Should i ask my client’s tax advisor to prepare a letter explaining the situation?2) As long as the 1099r is recoded to 4, and the account is re-titled, will this be a tax free event? 



Submitted by Alan - IRA critic on Thu, 2019-07-18 19:09

Yes, tax free. The retitling or account transfer should be non reportable and not generate a 1099R, but the 3000 distribution in 2018 should generate a corrected 1099R with code 4. That will eliminate any penalty on that distribution but if the return has been filed an amended return will be needed to get the penalty refunded. A letter to the IRS should not be needed unless the IRS inquires about any of these transactions.



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