I erred-rolled over an inherited tax deferred $ to my IRA. I w/d the improper funds. Vanguard said they'll show on 1099-R removal of excess contrib. How show on Turbo?

[jagucla]

My mother died and left a lump sum California State Retirement tax deferred benefit to me.  I had the option of cashing it in or rolling it over to an Inherited IRA.  I am 70 years old  and erroneously rolled it over to my IRA rather than to an inherited IRA account.  When I discovered I erred, I withdrew the "excess contribution"  and put it in my checking account.  Because I was not a spouse, the rollover is not correct.  Vanguard deposited to my IRA in good faith, based on my instructions.  Last week I sent Vanguard an email explaining my predicament and Vanguard sent a detailed email saying they will report the excess contribution removal on IRS form 1099-R which I will receive in January.  They also said I might need to complete IRS form 5329 and IRS form 8606.  My concern, of course, is that IRS will show double the RMD distribution- one  from the California State Retirement and one from Vanguard.
When I do my taxes on Turbo next year, how will I report the distribution from the State of California and Vanguard?

[macuser_22]

It depends on which tax year the excess contribution was made and which tax year it was removed and what code they put in box 7 as to which tax year the 1099-R must be reported in.  

You enter a 1099-R in the retirement, 1099-R section  to report it.

[dmertz · Accepted solution]

Based on the last sentence of your question, it appears that both distributions took place in 2017.  You will receive two 2017 Forms 1099-R and both must be reported.

First, the Form 1099-R from the California State Retirement:  If the distribution from the California plan was paid to you and the plan knows nothing about you rolling over the distribution, the Form 1099-R will have code 4 only and you'll enter it as received.  Otherwise, since you are a non-spouse beneficiary, a rollover to an inherited was permitted only by direct rollover to an inherited IRA and the Form 1099-R from the California plan would have codes 4 and G in box 7.  However, since the rollover did not go to an inherited IRA that was eligible to receive the rollover, the distribution from the California plan failed to qualify as a direct rollover and a Form 1099-R that includes code G will be incorrect.  The distribution instead constitutes a regular distribution due to the death of the participant.  If you contact the California plan before the end of the year, the plan might be able to issue a correct Form 1099-R with code 4 only, no code G.  However, the plan will likely issue a Form 1099-R with both codes 4 and G, and once they decline to make the correction you'll have to file a substitute Form 1099-R (Form 4852) to report the distribution with code 4 only and the correct taxable amount in box 2a.  The correct amount to report in box 2a will be the amount in box 1 minus any nontaxable amount appearing in box 5.  You'll need to indicate in the follow-up that you did not roll over this distribution.

Second, the Form 1099-R that you'll receive from Vanguard:  This Form 1099-R should show code 8 in box 7 and will have the IRA/SEP/SIMPLE box marked.  A return of contribution before the due date of your tax return is required to include any gain or loss attributable to the contribution being returned, and only the gain should appear in box 2a of this Form 1099-R as the taxable amount.  With a proper return of contribution having been received, there is nothing to be reported about having deposited in the traditional IRA other than in the information to be included in the required explanation statement.  (Be sure to click the Continue button on the Your 1099-R Entries page to reach TurboTax's prompt for the explanation.)

Nothing about these two Forms 1099-R requires Forms 5329 or 8606 to be included with your tax return.  Only if you have basis in nondeductible traditional IRA contributions and make a separate regular distribution from your traditional IRA or you make a nonqualified distribution from a Roth IRA will you need to file Form 8606.  Your Form 1040 line 15a or Form 1040A line 11a will include the gross amount distributed from the Vanguard IRA but only the taxable amount will be included on line 15b or 11b.  If less than the gross amount distributed from the California plan is taxable, the gross amount will be included on Form 1040 line 16a or Form 1040A line 12a.  The taxable amount of the distribution from the California plan will be included on line 16b or 12b.

Any regular distributions that you made from your traditional IRA, say, an RMD, would be reported on a separate code 7 Form 1099-R with the IRA/SEP/SIMPLE box marked.