Annuity within an IRA is cashed. Proceeds stay in IRA. 1099R shows taxable gain. Is this correct, so gain is taxed twice? If not, how do I adjust for this on my return?

[SJM1]

My father died in 2018. As a result, an annuity within his traditional IRA was cashed out and the proceeds retained within the IRA. The IRA is going to the surviving spouse, which happened in 2019, but that is not my issue.

The 1099R from the issuing insurance company shows this as a 7D, normal distribution of "an annuity payment of a non-qualified plan that may be subject to tax." The "taxable amount" in box 2a is the gain above the purchase price.

Do I report this gain as taxable, or do I make an adjustment for it? And if it can be deferred since it's within the IRA, how do I do this within Turbo Tax? 

Since all the proceeds were paid directly to the broker who placed it back within the IRA, it seems that taxes would be paid twice if taxed this year and then his spouse has to pay again when the IRA is distributed. Hope this makes sense. 

Thank you for any help.

[dmertz]

It appears that there is some confusion over the nature of the account from which the distribution was made.  As you have found from your research, codes 7 and D together indicate a distribution from a nonqualified annuity, paid to the annuity participant, not to a distribution from an IRA and not to a distribution paid to a designated beneficiary.  Presumably this Form 1099-R also does not have the IRA/SEP/SIMPLE box marked.

Assuming that the Form 1099-R is correct, which seems likely since it would be highly unusual for a financial institution to confuse an IRA with a nonqualified annuity, being a distribution from a nonqualified annuity it is taxable to the recipient and is not permitted to be rolled over.  Whatever amount of the proceeds of the surrender of this annuity was put into an IRA would be a new, unrelated contribution to the IRA and, to the extent that it exceeds the permissible amount to be contributed as a new IRA contribution, it would be an excess IRA contribution.