Complicated Rollover

[dariow]

I have a complicated situation. I have an inherited IRA in funds that closed so I needed to roll it over. I attempted to get the brokerage to send a check to new new IRA brokerage and to roll it over into that account . Instead the brokerage sent me a check and I deposited that check into the new IRA account within 60 days.

Unfortunately, the brokerage that sent me the money withheld federal taxes. I went to a CPA and he told me that only the fed tax withheld amount is taxable since I rolled over the other amount into an IRA within 60 days.

The CPA said that I should fill out the 1099 in turbotax exactly as the document I received and find an entry that allows me to enter the dollar amount that was rolled over and the dollar amount that wasn't. Example: net distribution was $300,000 and they withheld $50,000 and sent me a check for $250,000. I want to report that I rolled over $250,000 and should only be taxed on the $50,000 amount. How do I make that entry into TurboTax? I thank you for your help.

[dmertz]

Are you a spouse beneficiary or a non-spouse beneficiary?

[dariow]

I am the son of the decedent.

[dmertz]

I assume that the Form 1099-R that you received has code 4 in box 7.  Unfortunately, an IRA inherited by a non-spouse beneficiary is only permitted to moved from one inherited IRA to another by nonreportable trustee-to-trustee transfer (which you attempted to get the old IRA custodian to do).  Distribution and rollover is not permitted.  This means that the entire distribution is taxable and the deposit into the new inherited IRA constitutes an excess contribution.  The CPA you talked to should have known this.  Because TurboTax knows that a code-4 Form 1099-R issued to a non-spouse beneficiary represents a distribution that is not eligible for rollover, TurboTax will not permit you to report the distribution as having been rolled over.

Had the check been made out to the receiving IRA, not to you personally, and the check was given to you simply to convey the check to the new custodian, this would have constituted a nonreportable trustee-to-trustee transfer, but in that case there would have been no tax withholding.  The fact that taxes were withheld seems to imply that there was indeed a distribution from the original inherited IRA.

Congress has been discussing changing the tax code to permit rollovers of inherited IRAs by non-spouse beneficiaries, but that change hasn't happened.

(The only type of distribution and rollover permitted by a non-spouse beneficiary is a direct rollover from an employer plan like a 401(k) to an IRA, reported with codes 4 and G or 4 and H in box 7 of the Form 1099-R.)

[dariow]

The 1099-R sent to me from the broker (CGM Funds) of my old IRA account was in error.

The request was for a direct transfer which the original broker did not do, and they are out of business and cannot correct the 1099-R. 

How do I report an incorrect 1099-R in turbotax?

[dmertz]

Just to be sure that I've interpreted your description of this correctly, please answer the following questions:

1. What is the code in box 7 of the Form 1099-R?
2. Is the IRA/SEP/SIMPLE box marked?
3. Is any amount shown in box 5?
4. Was the check that they gave you made out to you personally or was it made out to the new custodian for your benefit?  (The fact that taxes were withheld suggests that it was made out to you personally.)

[dariow]

• What is the code in box 7 of the Form 1099-R?
  • Answer: Box 7 is marked 4
• Is the IRA/SEP/SIMPLE box marked?
  • Answer: Yes
• Is any amount shown in box 5?
  • Answer, I do not see any line 5 in the 1099-R
• Was the check that they gave you made out to you personally or was it made out to the new custodian for your benefit?  (The fact that taxes were withheld suggests that it was made out to you personally.)
  • Answer: Check was made out to me in which I deposited into the new IRA account.CGM, which had my IRA did not follow my instructions which was to transfer it to my Fidelity account. Is there a way in TurboTax to point out that the 1099-R is wrong and should be corrected? Unfortunately, CGM funds is out of business. The IRA is 275k. The tax cost on that would be astronomical. 

[dmertz]

This confirms what I said before, that you received a distribution that was not eligible for rollover despite the instructions that you gave the old IRA custodian to perform a nonreportable trustee-to-trustee transfer.  The tax code has no provision make the deposit of these funds into the new inherited IRA permissible because the funds came under your control when the check was made out to you and you cashed it.  In fact, the new IRA custodian should not have allowed these funds to be deposited into the new inherited IRA knowing that the funds had been paid to you and not directly to them for your benefit.  This means that the deposit into the new IRA constitutes an excess contribution (and the new IRA fails to qualify as an inherited IRA despite its titling).

It seems that your only recourse would be legal action against the old custodian in an attempt to obtain compensation you for whatever losses will result from not being able to spread out the distributions out over multiple years, but that could be a lost cause if the old IRA custodian is no longer in business.  You might want to talk to an attorney experienced in such matters.

It seems unlikely that you would have any success attempting to claim that the portion deposited into the new inherited IRA was actually done by nonreportable trustee to trustee transfer because you won't be able to show that the funds were paid to the new IRA custodian and not to you.

Mistaken distributions from inherited IRAs when a non-spouse beneficiary attempts to move the IRA have been problems often enough for people that Congress has considered changing the tax code to allow such a distribution to be rolled over, but that change has not been made.  Such distributions are not permitted to be deposited back into an inherited IRA.

[fanfare]

dmertz  says you put the money into an inherited IRA.

Is that correct?

is the money now in an account showing you as beneficiary and father as owner?

I don't think you said that.

@dariow 

[dmertz]

Because you had requested a trustee-to-trustee transfer, I assumed that the "new IRA"  was established as an inherited IRA.  If not, this is truly a taxable distribution from the old inherited IRA and a massive excess contribution to the new IRA.  In that case the new IRA custodian did nothing wrong in thinking that this was a rollover from your own IRA and allowing the deposit of a rollover, but the deposit still does not legally constitute a rollover.

Whether the account is titled as inherited or not, it does not constitute an inherited IRA and the deposit does not constitute a rollover.  Instead, the deposit constitutes a regular contribution, far in excess of the contribution limit from 2022 of $6,000 (plus $1,000 if you are over age 50).  With a roughly $244,000 excess contribution ($250,000 minus $6,000), the penalty is  6%, roughly $14,640, every year that the excess remains in the account.

[JDF64]

I have a very similiar issue.  I also had an inherited (non-spousal) IRA with CGM Group.  They closed and refused to do a direct transfer to another existing inherited IRA I had at another financial institution.  After working with them for several months, they finally cut me a check payable to my mom DCD for the benefit of me.  I did not sign or cash that check.  Instead I hand carried it to the other financial institution who deposited it into my other existing inherited IRA which was also my mom DCD for the benefit of me.  Unfortunately, CGM sent me a 1099-R reflecting the amount as a total distribution and included the amount in the box 2a taxable amount.  The other institution sent me a Form 5498 reflecting the total value of the inherited IRA (i.e., including the amount from CGM).  They did not reflect any amount in Box 2 for contributions or rollover.  They said this situation is considered a transfer.  They also advised me that this in NOT a taxable event.  However, I do not know how to input this situation into turbo tax.  Does anyone know?

[dmertz]

@JDF64 , that's a really odd way to make out the check and it's unclear to me whether or not this check actually constituted a trustee-to-trustee transfer or instead was a payment to you.  However, since the receiving custodian accepted the check without you endorsing the check and did not report it as a rollover, it seems that they believe that you were not the payee and that this was indeed a trustee-to-trustee transfer.

What is the code in box 7 of the Form 1099-R?

Is the IRA/SEP/SIMPLE box marked?

I'll assume that the code in box 7 is 4 and that the IRA/SEP/SIMPLE box is marked.  In this case, given the uncooperativeness of CGM, it seems that you will have to submit a substitute Form 1099-R (Form 4852) showing zeros in boxes 1 and 2a and explaining that the payment to the new IRA constituted a nonreportable trustee-to-trustee transfer and not a distribution paid to you.

If the IRA/SEP/SIMPLE box on the Form 1099-R from CGM is not marked, the distribution was not from an IRA and the substitute Form 1099-R needs to be prepared differently.