Possible incorrect distribution code on 1099 R - do you agree?

[bmg60]

Helping my sister with taxes.  We received an inheritance in 2023 from our aunt.  We were listed as a beneficiaries on several annuities - these were not IRA related. We both cashed those annuities out and paid applicable taxes.  She took the proceeds from the annuities and combined those funds with a cash payout from the estate.  A new annuity was opened. In 2024, she received a distribution from the annuity.  The distribution code on the 1099R shows as 4D (death/nonqualified annuity).   I feel the distribution code should be 7 - normal distribution? (FYI she is not retired, whereas I am.  I am using my funds to supplement my monthly SS income, thus not having to touch any retirement related accounts).  Do you agree?

We were also listed as beneficiaries on a retirement account.  It is our understanding that we must continue taking the RMD yearly but also must use the funds within a 10-year period.  She is taking 1/10th of the balance annually thus taking more than the calculated RMD.  This 1099 R shows a distribution code of 7.  I think this should be coded with a 4 - death.   I am currently taking only the required minimum and delaying tax implications.  My distribution code is showing as a 4.   Any idea which is correct?

Thank You in advance.

[dmertz]

You are correct.

Your sister's nonqualified annuity is not an inherited annuity if she simply purchased her own annuity with cash.  She should have a code 4D Form 1099-R that reports the cashing in of the inherited annuity, but any distributions from the annuity that she subsequently purchased should be reported with code 7D.

As for what is supposed to be an inherited IRA, I suspect that the custodian that held your aunt's IRA initiated a nonreportable trustee-to-trustee transfer of your sister's share to an inherited IRA for the benefit of your sister, but somehow the receiving account got mistakenly coded in the custodian's records as an owned rather than an inherited IRA.  That custodian will need to correct their records and issue a corrected Form 1099-R.  However, if a distribution was paid to your sister form your aunt's IRA (which is distribution that is required to be reported on a code-4 Form 1099-R) and she subsequently deposited the funds into a new IRA,  that IRA can't be an inherited IRA and the deposit of those funds constitutes an ordinary IRA contribution.