Inherited IRA distributed after December 31st. What are my options?

[navysuit]

I inherited an IRA from my brother who passed away in 2021. I was supposed to take a distribution no later that the year following his death. I put in for the distribution at Vanguard on the 28th, but it took them until after December 31st to distribute it. I never received a 1099R. I've read that you can be penalized 50 percent for this, but the IRS can make an exception. I was going to include a letter.

First of all, how do I reconcile this? Do I try filling the 15k in distributions for the 2022 tax year or 2023 tax year? I may actually receive the 1099R for 2023. The problem with Turbo Tax is that it wants all this information for a 1099 I never received. It is taxing me about 5k for the 15k in inherited distributions I took out. I think it is calculating penalties or something, since I don't have the correct code. Can anyone help?

[LindaS5247]

If you received it in 2023 you should report it in 2023.  If you received it in 2022 you should report it in 2022.  If you got the money on December 31, 2022 they should provide you with a 1099-R for 2022. I'm not sure by your question if you actually got the money December 31, 2022 or in 2023.

Generally speaking, distributions from an inherited traditional IRA are taxable, just as they are for non-inherited traditional IRAs. Distributions from an inherited Roth aren't taxable unless the Roth was established within the past five years.

As for the Form 1099-R:

When a taxpayer receives a distribution from an inherited IRA, they should receive from the financial instruction a 1099-R, with a Distribution Code of '4' in Box 7. This gross distribution is usually fully taxable to the beneficiary/taxpayer unless the deceased owner had made non-deductible contributions to the IRA.

When it comes to inherited IRAs and other retirement plans, the rules can get pretty complicated, but we're here to help. When you indicate in TurboTax that your IRA or plan was inherited, we'll ask a series of questions to determine how much, if any, is taxable on this year's return.

A little more information on Inherited IRA's:

You will be receiving form 1099-R and it needs to be reported as such; please be sure to enter the form information into Turbo Tax exactly as it appears and answer the follow up questions. The tax treatment of the inherited IRA depends on whether it was inherited from a spouse or a non-spouse.

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NOTE:  The tax treatment of an inherited IRA depends on whether it was inherited from a spouse or a non-spouse.

1.  Inherited from a spouse.

If you inherited a traditional IRA from your spouse, there are three choices:

1. You can treat it as your Own IRA by designating yourself as the account owner.

2. Treat is as your own by rolling it over into your IRA, or to the extent it is taxable to a qualified employer plan.

3. Treat yourself as a beneficiary rather than treating the IRA as your own. 

You will be considered to have chosen to treat the IRA as your own if you made contributions to the inherited IRA (your above the line deduction) or you do not take the RMD -required minimum distribution for a year as a beneficiary of the IRA.

2.  Inherited from a non-spouse.

If you inherited the IRA form a non-spouse, you cannot treat it as your own.  It means you cannot make any contribution, you cannot rollover any amounts into or out of the IRA, other than trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.  You also must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.

If you received a distribution from an inherited IRA, it is added to your income and taxed accordingly. You will be receiving a Form 1099-R indicating your distribution as a “death distribution” – code 4 in box 7 will be applied.

Please enter this form in the Wages and Income section, as you will be asked additional questions about the decedent. For example, if the decedent made any nondeductible contributions. Why is this important? Well, nondeductible contributions are treated as return of investment and are not taxable; it may be beneficial for you to find out (often your plan administrator, broker or banker has this information or form 8606 from prior years' tax return should indicate that information ).  You will also be asked if the original owner of the IRA passed away after he/she was 70 ½, did he/she take required Minimum Distribution (RMD) in the year of death. Again, your plan administrator should know and you should as well…if the RMD was not taken, a 50% penalty on not distributed amount may be applied.