Inherited IRA?

[nerdygardner]

Long story....my mother in law passed away May of 2023, and she had some sort of retirement account.  There was about 210,000k in it.  A few weeks after her passing, mother in laws financial "guy", whoever took care of the account, contacted us, and said my wife and her 2 sisters would be splitting whatever was in the account.  We would be receiving our 3rd (about 71k), into our bank account, and we were to contact him within 10 days? I think...so we could send the entire amount back to be put in an inherited ira fixed annuity account.  As long as we did this, (which we did within 5 days) it would not be taxed (yet), and would have zero impact on our 2023 taxes, filed in 2024. It would only be taxed starting after the 1 year anniversary as we have to empty the account within 10 years he said, taking 10% (or more) every year til its emptied out.

If we didn't, then we would be taxed (and penalized) on the entire amount.  

Today my wife got a 1099-r (in her/wife's name, not the estate of her moms/or her moms name as she is executor).  It lists the entire 70k as gross and taxable.  I go to put this into turbotax, and if I select "i inherited this ira", we go from being due a 5500 refund, to owing 12k.  It does not popup "was this rolled over into"......but yet if I uncheck that, it asks me was it rolled over to a new ira..or whatever and we are back to getting a decent refund.  Were we given bad advice from her moms financial guy?  He seemed to think it odd or incorrect that the 1099 that we received was in my wife's name, not her moms...or "the estate of".  Was the 1099 reported incorrectly?  I hate to have to find an actual accountant..time...money.

[fanfare]

The custodian has to retitle the IRA into three inherited IRAs.

If you want another custodian, the first custoidan has to do a trustee-to-trustee transfer for you.

If the money is totally distributed, you no longer have an Inherited IRA.

@nerdygardner 

[nerdygardner]

so wait, we were screwed?  Or is answering "i inherited this ira" not correct in our case? Not sure what we should do...we did get the entire amount direct deposited in our checking account, but we then sent the entire amount back and it was put into what he called "an inherited ira fixed annuity".

I'm kinda having a panic attack over this...not sure what is going on.

[rjs]

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@nerdygardner wrote:

Were we given bad advice from her moms financial guy?

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It looks that way. Since you don't know what type of account your mother-in-law had - "some sort of retirement account" - it's hard to say what could have been done differently.

You can't create an inherited IRA with cash. The IRA, if that's what it was, has to be divided up and retitled by the IRA custodian, as fanfare said. Generally with any type of tax-sheltered retirement account, once the money is out of the account it's out and taxable, unless it's rolled over to another retirement account with the same owner within 60 days. But you can't do a rollover from an inherited IRA. It's probably too late to do anything about it now.

Another person who frequents this forum, @dmertz,  knows much more about retirement accounts than I do, and might have something to add.

[nerdygardner]

omg...I'm having a major panic attack....I don't understand how this could have happened...

[rjs]

On the 1099-R that your wife received, what is the distribution code in box 7? Is the IRA/SEP/SIMPLE box checked (next to box 7)?

[nerdygardner]

4 and the box is checked yes

[nerdygardner]

Something just doesn't feel right...he is "adamant" that the money isn't taxed.  I mean, we woulda been better off just to have kept the money at this point...now the only way we could come up with enough cash to pay the amount due would be to take money out of the account before the 1 yr anniversary, meaning we would pay a crap ton of early withdrawal penalties.  I don't understand it at all...I am perplexed...did he not know what he was doing?  Besides some sort of commission or something...I don't know...what would he have to gain by having us do this?  I am sooooo confused.  It's now with American Equity incomeshield 7

I'm praying it's all a big misunderstanding or error somehow.....sigh....

[rjs]

That does look like it was a distribution from an inherited IRA. But apparently your wife took all the money out of the inherited IRA, whether or not she realized what she was doing. As I said above, once it's taken out of the inherited IRA it's taxable income.

Since it apparently was an inherited IRA, you have to tell TurboTax "I inherited this IRA." That tells TurboTax that you can't roll it over, which is why it doesn't ask if it was rolled over.

I'm not sure that your wife's new annuity account is a valid or legal retirement account or IRA. She couldn't make that big an IRA contribution all in one year. (Though if she meets the requirements to make a deductible IRA contribution, she might be able to deduct at least part of it.) It might be an excess contribution, for which she will pay a 6% penalty every year until the excess is removed. She may be able to avoid the penalty for 2023 if she removes the excess by April 15, 2024, but that presumably will incur an early withdrawal penalty.

The "financial guy" might be a crook, but more likely he is just incompetent. If he is "adamant that the money isn't taxed," ask him why your wife got the 1099-R showing it as taxable. If he says anything about a rollover, remember that you can't do a rollover from an inherited IRA.

Selling an annuity usually pays a big commission.

[dmertz · Accepted solution]

All of the previous replies are correct.  The funds can only be moved to an inherited IRA for the benefit of a non-spouse beneficiary by direct rollover (from an employer plan) or transfer (from an IRA, as in this case).  Once paid to to the non-spouse beneficiary, no deposit into an inherited IRA is permitted; the funds are irrevocably distributed and subject to the resulting tax consequences.  Adding $70,000 to taxable income likely has also resulted a tax underpayment penalty.

If the money was deposited into an IRA  that was intended to be an inherited IRA, rjs is correct that IRA fails to be an inherited IRA and constitutes an regular owned IRA no matter how it is titled.  The deposit results in an excess regular contribution that is subject to penalty unless corrected by the due date of the 2023 tax return, including extensions.  However, with the funds in an IRA annuity, you might suffer a surrender charge to be able to obtain the corrective distribution.

I also agree that, in my opinion, the financial guy is, at best, incompetent.