Q.: I’m supposed to pay a big chunk of taxes for money I really didn’t get since it was indirectly rolled over to another IRA account when I inherited my aunt’s IRA after she passed away.
I received a check but it was deposited right away to another IRA, I got a letter from the initial institution that a lump sum was taken and it was a qualified account. The 1099R that was sent to me in January 2022 had a distribution code of “4.” I told them that it was rollover, but they wouldn’t amend the distribution form. The financial adviser (where it was rolled over) said that it was a qualified account to be rolled over and doesn’t make sense that I’ll be taxed twice every time I withdraw from it for the next 10 years.
Is there something that I could do so that I won’t be taxed for it as an added income instead of tax deferred IRA since it was really a rollover?
A. Hi Louise,
So sorry to hear of your aunt’s passing.
I’m not sure I’m giving good news or bad news here. There are differing forms of rollovers. The main issue is to whom the check from your aunt’s IRA was made payable. You will need to engage your tax preparer on how to file everything correctly.
If the check from your aunt’s IRA was made payable to a separate Inherited IRA for your benefit and not to you individually, the transaction should not be taxed. Sometimes these transfers are referred to as a “direct rollover” which makes things confusing because a direct rollover is different from a traditional rollover.
In a traditional rollover, sometimes referred to as an “indirect rollover,” the money goes indirectly from account to account. The check is made payable to an individual and if those funds go back into an IRA or eligible retirement plan within 60 days, there is no tax due. Only one traditional IRA to IRA rollover can be executed in any 12 month period.
Your question suggests the check was payable to you as an individual. You may have been thinking you had 60 days to get it in another IRA as is the case with a traditional rollover. Normally, that is true — except when inheriting.
Distributions to a nonspouse from an IRA after death are NOT eligible for traditional rollover. If that check was payable to you individually rather than an Inherited IRA for your benefit, the entire distribution is taxable to you.
Further, you said the funds went into another IRA. If that’s the case and the original distribution check was made payable to you, you have likely made an “excess contribution” because the distribution was ineligible for traditional rollover to an inherited IRA. Only surviving spouses can roll a deceased’s IRA into their own IRA.
If you have made an excess contribution, those funds will need to come out of the IRA in which they currently reside. You will not owe income taxes on the funds again, just the one time from the original distribution. However, you could owe tax (plus a 10% penalty if you are younger than 59 ½ when the correction is made) on any earnings on those funds while improperly in your IRA. In addition, you may owe a 6% excise tax on the excess contribution itself. The 6% is assessed every year the excess remains in the account so it should come out as soon as possible.
If you have a question for Dan, please email him with ‘MarketWatch Q&A’ on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.