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Inherited IRA direct transfer and 1099-R, Form 5498

Hi, having trouble with this. Spouse inherited portion of deceased MILs IRA (along with siblings) in 2023. Inherited IRA account was set up in spouse's name at OLD firm where deceased MIL had her account. Funds were transferred into new account - this was temporary (like a day) as funds were then transferred to new firm in a new Inherited IRA under spouse's name, with deceased MIL listed as the original owner.  (Note we tried not to do it this way - we tried a direct transfer from deceased MIL to NEW firm but couldn't because OLD firm required a letter of acceptance that NEW firm could not provide; therefore we moved the funds into an inherited IRA account at OLD firm, then transferred to NEW firm).

 

1099-R that was received from OLD firm showing my spouse's share of the IRA as a distribution with code '4' = Death. When entered into TT, it thinks this is a regular distribution and wants to tax us on it. So we contacted the OLD firm and they say, oops, we made a mistake, sorry, and issued a NEW/Corrected 1099-R. This one shows all 0's but still shows code '4' = Death. It also has some boxes checked 2b and 7 (the old one did too) for 'taxable amount not determined; total distribution; and IRA/SEP/SIMPLE. 

However, prior to issuing the CORRECTED  1099-R, the advisor actually told us that they shouldn't have sent a 1099-R at all. I am now very unclear if this new/corrected 1099-R will still pose problems; and/or if there is any way for the firm to rescind it all together?

 

Next, on the receiving end of the inherited IRA - the old firm sent a check to the new firm and the funds were deposited into the new inherited IRA account. The NEW firm has issued Form 5498 which I find confusing because it says  on line 2: 'Rollover contributions' with the amount shown, then line 7 IRA type shows IRA; Box 11 is not checked (required min distribution for 2024); and the original depositor's name (deceased MIL) is shown below that.

 

Now I'm unclear if either/both of these forms are correct. I keep reading that we shouldn't have been given a 1099-R, and in fact the OLD firm told us that; but does our setting up the account first at OLD firm change that requirement at all? I was told it was a direct transfer, which I thought would not trigger a 1099-R. Should I be asking the 'old' firm to correct this again? Is there even a way to correct a 1099-R that should never have been issued? They apparently think the corrected 1099-R they sent is sufficient.

 

When I go to enter the 1099-R in TT, it asks me about taking a required RMD, which we DID take but only once the funds were transferred to the new inherited IRA account with the NEW firm. So for this 1099-R which shows 0 distribution, do I enter in TT saying I did not take an RMD?

 

But then when do I say I did take an RMD? Note I have also entered the form 5498 which shows the RMD but I can't recall what questions were asked with that one.

 

And, should we have gotten form 5498 from the new firm since this was a direct transfer? Or is this in error from the new firm?

Thanks for any and all help. 

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1 Reply
SusanY1
Expert Alumni

Inherited IRA direct transfer and 1099-R, Form 5498

I would agree that you probably shouldn't have gotten a 1099 at all since this was a direct transfer.  There are no rollovers allowed for Inherited IRAs, but direct transfers are fine, and it sounds like you did everything exactly the way that you were supposed to. 

So, now what?  You can continue to ask that the first institution "rescind" the 1099 and that they give you something in writing,acknowledging that they sent the funds directly to the new custodian.  However, even if they amend/rescind the 1099-R it may still make its way through the system in a way that has the IRS inquiring about it.  

 

Make notes in your own records of who you spoke to and when.  Print out anything that you have that would support that this was a direct transfer, and do that now while you still have easy access to the information.  This might include (if available) statements or online activity records from both the old account and the new account.   At the time the funds were received your current custodian should have a note of how the funds were received.  It could also help to print bank account records of your personal bank activity in that same month to show that the funds were not deposited by you.  That's less direct evidence, but it won't hurt to have it handy, too.  

Save that data in a safe place so that if the IRS asks for an explanation of unreported income you'll have it available to send back without having to try to remember where it came from or request special access to older records.  Hang on to this information for at least three years.  



 

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