Inherited IRA 1099 R

[captaind51]

We inherited an ira from my wife's father when he passed away that we moved into an inherited IRA after taking out the RMD. We received a 1099 R showing the full IRA amount as taxable and TurboTax, after entering the information wants to tax the full amount as if we cashed the whole amount. I'm thinking I should not have received the 1099 showing all as taxable or am I missing something?

I do have two forms 5498, (1 shows the full IRA amount, the other shows the amount after the RMD that was transferred) just not sure what to do with them.

[dmertz · Accepted solution]

The code 4 Form 1099-R implies that a distribution was made that is not eligible for rollover because it was made to a non-spouse beneficiary.  An inherited IRA can only be moved by nonreportable trustee-to-trustee transfer.  (Trustee-to-trustee can be within the same trustee).

If the account was actually properly moved by trustee-to-trustee transfer with no payment made to the beneficiary, no Form 1099-R should have be issued and you'll need to contact the trustee to obtain a corrected code 4 Form 1099-R showing that no distribution occurred.

Since a trustee-to-trustee transfer is neither a distribution nor a rollover, there should also be no rollover contribution shown on a Form 5498 from the inherited IRA.

If a distribution was actually made by paying it to the non-spouse beneficiary, putting it into an inherited IRA as if it was a permissible rollover constitutes an excess contribution to the inherited IRA that would be subject to penalty.

[captaind51]

I'm a little confused. (Note: my wife is the sole trustee for the trust and the recipient or the IRA funds as the beneficiary of the IRA.)
The IRA was moved by our (new) investment company to a special "Inheritance IRA" and the only distribution was the RMD funds taken out before the end of 2018. The remainder went straight to the new "Inheritance IRA"

The two 5498 forms came with the 1099 R (separate envelopes) but are shown as 2017
The 1099 R is shown for 2018, all three were received from the original company that held the IRA not a "trustee"

[dmertz]

Perhaps I misunderstood.  You said, "We received a 1099 R showing the full IRA amount as taxable."  I interpreted this to mean that your wife received a code 4 2018 Form 1099-R showing in box 1 the entire value of the inherited IRA.  If I misunderstood, please explain what you mean by "the full IRA amount."

[captaind51]

Yes, the IRA was transferred to an Inheritance IRA and I've received two 5498's which I think was correct, but we also received a 1099 R code 4 for 2018 that box 1 and 2a showing the full amount of the original IRA (box 2a being the taxable amount) That was why I'm thinking I should not have received the 1099 R since we never took the IRA funds out, we rolled them into an "Inheritance IRA" in my wife's name The only monies taken out were for the RMD

[dmertz]

The term "trustee" refers to the company holding the IRA account because IRA accounts are actually trusts under the tax code.  The term "trustee" is used interchangeably with the term "custodian."  A "trustee-to-trustee transfer" is roughly equivalent to changing investments within an IRA since it represents neither a reportable distribution from the old IRA nor a reportable rollover to the new IRA.

A code 4 Form 1099-R issued to your wife with an amount in box 1 equal to the full value of the IRA implies that the entire IRA was distributed to your wife, not moved by trustee-to-trustee transfer.  Because your wife is a non-spouse beneficiary, such a distribution is not eligible for rollover and TurboTax will not permit indicating that the distribution was rolled over.

Handled properly, the RMD would have been paid to your wife and only the amount of the RMD would appear in box 1 of the 2018 Form 1099-R.  The rest should have been moved to the inherited IRA at the new investment company by nonreportable trustee-to-trustee transfer, so the amount that was moved should not be in box 1 of any Form 1099-R.

Presumably your wife's father died in 2017.  One of the 2017 Forms 5498 is apparently reporting the date of death fair-market value and would have been issued to your wife's father.  The information on this Form 5498 is useful for valuing the asset if the decedent's estate is subject to federal or state estate taxes or there is state inheritance tax.  The other 2017 Form 5498 would have been issued to your wife showing the 2017 year-end value needed to calculate her 2018 RMD.  These do not have anything to do with the movement of the inherited IRA.  (In my answer I had assumed that these were 2018 Forms 5498.)

[captaind51]

>Handled properly, the RMD would have been paid to your wife and only the amount of the RMD would appear in box 1 of the 2018 Form 1099-R<

That is what I was concluding from my research, that at most the 1099 R should have shown only the RMD funds. I was not sure what the 5498's were for.

 I will contact the person who moved the funds to the new "Inheritance IRA" to see about getting this corrected. (Or the old company)

Due to the time constraints, how should I handle the current 1099 R, leave it out of the current tax return or ?

Thanks for your help.

[dmertz]

Request a filing extension and, (if you ultimately expect to have a balance due) pay the expected balance due by April 15, 2019, then complete your filing by October 15, 2019.