Inherited IRA transfer into Rollover IRA

[mkhowe1]

In 2015 (year of spouse death) I moved my deceased spouse IRA into inherited IRA, all within vanguard.  In an effort to simplify my accounts moving forward I was working on moving the assets in the inherited IRA to an existing IRA of mine in same brokerage firm.  I am being told by vanguard this will generate a 1099-R and a 5498 form.  In viewing another question on this forum with similar activity it was communicated a 1099-R should not be generated as it should be done as a direct transfer.

I also did this at a different brokerage firm and they said it will not generate a 1099-R.  Looking for some education and what I should expect if I move forward with vanguard.  It is possible something is lost in translation.

[Bsch4477]

There may be a misunderstanding. The important issue is not the generation of a 1099-R but the distribution code in box 7 of that form. Ascertain from Vanguard that the code will exempt the roll over from tax. 

[VolvoGirl]

Did you have your own IRA account in Vanguard back in 2015?  They didn't move her IRA into your IRA back then?  When my husband died last year Vanguard just moved his IRA into mine.  No 1099R at all.  If you had a Inherited IRA were you taking withdrawals from it?  I think an Inherited IRA is different than a spouse's IRA.  What kind of IRA account do you have at Vanguard?  Is it a ROTH IRA?  I'll page @dmertz  for more info.  But yes, ask Vanguard what code will be in box 7.  Like code G?  

[Opus 17]

I believe that, under the rules in place in 2015, you could either

a. assume ownership of the IRA, or

b. keep it as an inherited IRA.

You had to the end of the year, or possible April 15 of the following year, to make that decision.  However, once making the decision, you can't change it.  If you have an inherited IRA ("John Smith as beneficiary for Mary Smith") then it is an inherited IRA forever and it can't be mixed with regular IRA funds that you own in your own name.

On reading the 2016 version of publication 590-B, it is not clear to me whether the decision is revokable or not.  Some factors that might help us help you are,

a. have you made contributions to the inherited IRA?

b. have you been taking RMDs from the inherited IRA following the rules for inherited IRAs?

One thing you can definitely do is rollover the inherited IRA from one bank to an inherited IRA at another bank or broker.  If this is done by direct trustee- to trustee transfer, I don't think you get a 1099-R, and even if you do, it's not a taxable event.  

I don't know if, at this point 10 years later, you can assume ownership and combine the funds with your own non-inherited IRAs.  I'm going to wait for the top expert to comment.

@dmertz 

[mkhowe1]

I did have my own IRA with Vanguard at that time.  I chose to move it to an inherited IRA as this would give me the opportunity to take withdrawals if I decided to retire a little early.  If I didn't take withdrawals by the time I turned 59 1/2 i would transfer to my IRA so RMD withdrawals would be based on my age, not hers..  She was a few years older.  I did not take any withdrawals.

I guess the red flag for me was one brokerage says it would generate a 1099-R and 5498 where the other brokerage, which I already executed this transaction, told me I would just receive the 5498.

[Opus 17]

@mkhowe1 

As long as it is legal to rollover a spousal inherited IRA from 10 years ago into your own IRA (something about which I am not sure), then the 1099-R is irrelevant.  If you get one, you just say it was a rollover, and it won't be taxable.  

[dmertz]

The person at Vanguard is largely mistaken.  Although the account can be moved to your own by reportable distribution and rollover, it is permitted and preferable to move it by nonreportable trustee-to-trustee transfer as you did with the inherited IRA held at a different firm.  Moving it by distribution and rollover involves the one-rollover-per-12-months limitation on IRA rollovers while trustee-to-trustee transfers of IRAs do not.

(There is a special rule regarding catch-up of RMDs in certain situations for surviving spouses subject to the 10-year rule, but the 10-year rule does not apply with regard to decedents dying before 2020, so the special RMD catch-up rule does not apply.)

If Vanguard refuses to move the inherited IRA to your own IRA at Vanguard by nonreportable trustee-to-trustee transfer, you might consider moving the account by nonreportable trustee-to-trustee transfer to an inherited IRA at another firm that is more accommodating (which Vanguard should certainly know is permissible), then doing the trustee-to-trustee transfer to your own IRA there.

Note that you should perhaps not be receiving any Form 5498 from the other firm, certainly not one reporting any rollover since you did no rollover.  Unless there was a deposit into the IRA other than a trustee-to-trustee transfer, an IRA custodian generally just provides you with a year-end statement and supplies an actual Form 5498 only to the IRS.