1099-R for an Non Qualified, Inherited annuity that was rolled over

[gxt1]

This is similar to some other posts I've seen but not quite the same.

The wife inherited an annuity from her mother that was rolled over to her and a different company using a 1035 exchange. The money ended up in a Stretch Variable Annuity.

The base money in the inherited account was non qualified (already taxed) but the earnings from that inherited annuity account are taxable as are any earnings going forward after the rollover. Per IRS regs for the stretch annuity, the Annuity company calculates the RMDs at the begging and at the start of each successive year and pays them out monthly from the taxable portion (earnings) of the account first.

Here's the fun. I enter in the 1099-R as received (distribution code D4) and after entering in TT, the question pops up;

If the person had lived were they born before or after 1952.

Had they lived = wife's mom, so pre 1952

TT asks for the amount of the RMD due by Dec 31, 2024. Well, the whole distribution was an RMD to my understanding.  I enter in the entire distribution amount and it gets taxed a 2nd time! I owe money! What the heck, it was already taxed as a distribution and the RMD amount matches the distribution so why doesn't it balance out?.

TT's next question: Was, None Some or All (entire) of the distribution applied to the Dec 31st, 2024 RMD

If I say All (entire). Again, you would think it would balance out,  RMD amount = Distribution amount, So no additional taxable money. It seems like the refund would go back to the original value it was before the "RMD due by 2024 question" came up. Nope. a totally different much lower refund.

Well, it's still a refund if I answer yes to the the next question of "was all of the distribution applied during "the correction window", if I say no, it wasn't during the correction window, I'm back to owing. What Correction Window?! The distributions were taken out month by month on schedule as required!

Eventually the taxable money runs out and what's left will not be taxable.

My guess is the Non Qualified 1035 Exchange Stretch Annuity "RMD" distributions don't fit the classic definition of an RMD and I should just tell TT that there were no RMD's due by Dec 2024. A distribution was made and tax paid, end of story but a person needs to be sure.

   Thanks in advance for any insights,

[gxt1]

Just more information. I spent a bunch of time talking with a TT support person who reached out to her resources and eventually came to the same conclusion of this is a bug in TT. How did we get to that agreement?

The RMDs were paid out monthly and I had withholding taken out, those values were reported on a 1099-R and entered into TT, so there should be no other potential liability (regarding the distributions) to report.

At the point where TT asks if a RMD was required by the end of 2024, instead of the actual value of the monthly distributions we received, I pulled $5,000 out of thin air and put it in. Then I say yes the entire distribution applied to the Dec 31, 2024 RMD

Next Screen TT puts up

It Looks like the difference between "your" RMD and what was taken out for this account is $5,000. The amount is subject to penalty but the rate is lower is if the money was withdrawn during the Correction Window.

TT's explanation of Correction Window

The Correction window is a set timeframe by the IRS that would allow you to correct a missed RMD.

No RMD was missed, they were taken out monthly. Any value put into TT for a RMD required by the end of 2024 becomes a missed RMD regardless of saying yes the entire actual received distribution  as noted on the 1099-R is to be applied to the required by Dec 31, 2024 RMD. With the result, the RMD was missed, you owe a penalty and did you fix it during the correction window?

Again, no RMD was missed. So it's either a bug in the wording of the questions (in TT), or it's a bug in the math.

[dmertz]

TurboTax currently has a bug that is being investigated regarding Forms 1099-R with codes 4 and D or 7 and D in box 7.  TurboTax should not be asking anything about RMDs when code D is present because nonqualified annuities are not subject to RMDs.  No matter which answer you select, TurboTax will later flag an error for your selection because neither can apply when code D is present.  There only workarounds currently available are to make a correction in forms mod of the download version of TurboTax or print and mail your tax return.

[gxt1]

Thanks @dmertz  it is a bug as expected. You talk about a forms modification for the downloaded version of TurboTax which is what I use. 

Switching to forms view I see TT has that particular 1099-R flagged

With the error being in the RMD Excess Accumulation Worksheet

Getting rid of the 0 for the required RMD amount does not remove the error but if I uncheck the "Other" for the account type, the error goes away which would appear to be the form mod you mentioned. With that done it passes the Federal Review.

No doubt that TT is working on a fix and it doesn't seem like one that would be onerous.

[dmertz · Accepted solution]

"if I uncheck the "Other" for the account type, the error goes away which would appear to be the form mod you mentioned. With that done it passes the Federal Review."

Yes, you've found what I was referring to.  When code D is present, all three of those boxes must be unmarked.  Step-by-step mode is forcing one of those boxes to be marked; that's the bug in step-by-step mode.