How to answer "Did you inherit the IRA" for spousal transfer?

[paperplasticcotton]

I'm helping Mom with her taxes. Her husband (Dad) passed away in 2022. (They're both 80+ years old.) She was the sole beneficiary of his SEP IRA. The brokerage transferred all funds from his SEP IRA into Mom's pre-existing SEP IRA at the same brokerage. Mom received two 1099-Rs from the brokerage for her sole SEP IRA 2022:

1099-R #1: Box 7 code = 4 (Death), no other code. box 1 = box 2a = the RMD Dad owed for 2022. This RMD was issued by the brokerage as part of their overall handling of the funds transfer, early in 2022. Of course, this RMD is just a fraction of the value of Dad's IRA, and the rest was properly transferred to Mom's IRA.

1099-R #2: Box 7 code = 7 (Normal), no other code. box 1 = box 2a = The RMD Mom took later in 2022 (based on the size of her account from before the transfer).

This tells me the transfer was a "nonreportable, trustee-to-trustee transfer" (correct?). Not considered a rollover (right?). So that takes me to TurboTax's innocent question for each of those 1099-Rs:

"Did <Mom's name> Inherit the IRA from <Brokerage name>?"

I can see arguments in favor of both NO and YES. (YES: She certainly inherited funds that now make up the majority of what's in her SEP IRA. NO: this is the very same SEP IRA account she already had, just with a larger balance now.)

If she answers YES, and fills in that it's her spouse, and that the money was put into Marilyn's own IRA account in 2022 (which SEEMS to be closest to the truth), then TurboTax characterizes these RMDs as Rollovers (saying so on 1040 line 4a, with 4b now 0). Now Mom pays no taxes on these RMDs. That's gotta be wrong, I think. Mom is responsible for paying taxes on BOTH distributions (from both 1099-Rs above), right?

So should she answer that she did NOT inherit the IRA for both 1099-Rs? If so, is there ANYWHERE that she needs to report that she inherited the IRA at all?

Thanks in advance!

[MaryK4]

Because there was a trustee-to-trustee transfer you would not indicate that it was an inherited.  For the #1 1099-R the Box 1=2a is as you say, a distribution to cover the RMD for your father.  If the Box 1 amount included the amount sent to her account, you would indicate that it was inherited to show the rollover.  I agree with you that the question is not a perfect fit in this situation.  

[fanfare]

it is not an inherited IRA because the spouse took it over.

because it is in the same year, 2022, the spouse still has to take the deceased's RMD based on the deceased's parameters, to the extent deceased did not do it.

[fanfare]

It's not clear to me how the year end balance for the spouse to calculate her 2022 RMD is determined. @dmertz

I suppose it's just her year-end balance minus the amount transferred, and there's no mystery herel.

[dmertz · Accepted solution]

TurboTax's phrasing of the questions regarding inherited IRAs is unnecessarily confusing and misleading.  It might help to understand that these questions are being asked in relation to the particular Form 1099-R being entered.

With regard to the code-4 Form 1099-R, answer Yes, it is a distribution from an inherited IRA (that's what code 4 means, so it's redundant for TurboTax to ask), that the distribution was from the the IRA inherited from "Your spouse,", and answer "I did not put the money into my own IRA account."  (This distribution was not rolled over.  It was not permitted to be rolled over.)

With regard to the code-7 Form 1099-R, answer No, it is not a distribution from an inherited IRA.

The 2022 RMD for Dad would have been calculated on Dad's 2021 year end balance using Dad's age in 2022 and the Uniform Lifetime table (or, if Mom is more than 10-years younger than Dad, the Joint Life and Last Survivor Expectancy table).  It's more common that this distribution would have been made after the trustee-to-trustee transfer to Mom's IRA to avoid the need to open and then close an intermediate inherited IRA for Mom's benefit and would have been included on the code 7 Form 1099-R instead of on the separate code-4 Form 1099-R.

The 2022 RMD for Mom would have been calculated on Mom's 2021 year end balance using Mom's age in 2022 and the Uniform Lifetime table (or, if Dad was more than 10-years younger than Mom, the Joint Life and Last Survivor Expectancy table).

Because Mom assumed ownership of the IRA inherited from Dad, the 2023 RMD is calculated from the combined 2022 year-end balance using Mom's age in 2023 and the Uniform Lifetime table.

[paperplasticcotton]

fanfare: Yes, Mom's RMD was calculated based on the FMV of her SEP IRA as of 12/31/2021 (before the transfer).

[paperplasticcotton]

>> If the Box 1 amount included the amount sent to her account, you would indicate that it was inherited to show the rollover.

I'm not sure there's an easy way to determine that.  According to the transaction history, on the very same day both (a) funds were transferred from Dad's to Mom's SEP IRA and (b) the Code 4 distribution was done.  The transaction history makes it appear like the Code 4 distribution came out of Mom's SEP IRA.  So I suppose I SHOULD specify the Code 4 SEP-IRA as inherited, AND "I did not put the money into my own IRA account", as suggested by dmertz?

What does everyone think?  Taxes via consensus opinion!  😀

[dmertz]

Code 4 indicates that the distribution came from an inherited IRA maintained for the benefit of your Mom, not from your Mom's SEP-IRA.  Because IRA custodians typically do no make any distributions until the funds have been moved, the code-4 Form 1099-R implies that your Dad's IRA was first transferred to an inherited IRA for the benefit of your Mom, that a distribution of Dad's RMD was made from that IRA, then that IRA was transferred to your Mom's SEP-IRA.  That intermediate inherited IRA account was an unnecessary step since your Dad's RMD could have just been taken from your Mom's SEP-IRA after a transfer of your Dad's SEP-IRA directly to your Mom's SEP-IRA.

Check the account numbers shown on the Forms 1099-R.

[paperplasticcotton]

>> Check the account numbers shown on the Forms 1099-R.

Both 1099-Rs show Mom's same SEP-IRA account number.  There is no other account number shown (not a temporary inherited IRA nor Dad's original SEP IRA).

The transaction history for Mom's SEP IRA online implies funds were transferred directly from Dad's SEP IRA to Mom's, based on the "Description" field which includes his account number for the transaction that credits Mom's SEP IRA.  Of course, the Description field is a freeform field where anything can be typed by brokerage employees, as opposed to a structured account number field.  So it might be fudged to simplify things, though I doubt it.

[paperplasticcotton]

Quick follow-up.  I followed @dmertz 's advice.  For the code 4 1099-R, after answering it was inherited but money was NOT put into Mom's account, TurboTax then sensibly asked if it was for an RMD for Dad, to which I answered yes.

The resulting 1040 is now properly taxing both distributions, and ROLLOVER no longer appears.

I'm guessing this is the right behavior for this situation, so I'll be going with this solution unless anyone has concerns.

Thanks again everyone!