fixing a failed inherited IRA rollover

[jboug4]

Hello 

A client accidentally rolled over an inherited 401k into an inherited Ira indirectly. This is strictly forbidden for non-spousal beneficiaries, but it was processed by the custodian to be deposited into an inherited IRA

They then moved the funds to a different custodian with me and realized that they need to be taxed on that money that got paid out in 2022 because that rollover was not allowed.

I now need to get the money out of the inherited IRA without being taxed.

The IRS said it needs to be removed as an excess contribution to an IRA with the custodian, but The new custodian (my custodian)  said they refuse to code it as a removal of excess contribution because the contribution did not happen there and that it must be processed as a taxable distribution - the other custodian said they would not be able to fix anything if it was taken back

So they are going to be taxed on the distribution from the 401k in 2022. Can the client complete a substitute Form 1099-R” (Form 4852) to correct the code from the new custodian if we have them distribute,- need i it shows up correctly as a removal of excess contribution to the IRS ?

Is there another way to get this money out and avoid having the IRS come seeking more tax that is required because of the 1099 R? 

[BobKamman]

You’ve come to an Intuit site supporting tax professionals.  We help each other help our clients, who pay us for our time and not with commissions.  There are other resources and continuing education for financial planners, and it may be safer to recommend your client seek tax help directly.  

[jboug4]

Thanks I understand. I am not paid a commission, but I do offer investment advice in addition to other services under my fee structure.

Any constructive input would be helpful

[qbteachmt]

"The new custodian (my custodian) said they refuse to code it as a removal of excess contribution because the contribution did not happen there"

It's not contribution, so it's also not excess. Contribution is the New Money each year for a qualified amount.

You have an ineligible rollover. You need to "undo" by corrective distribution. The taking is the same, but the codes used on the tax form will be different.

The party paying out only knows it went out. Their code isn't always applicable to the reality.

If this all happened in 2022, there still is time to correct for it.

The first entity 1099-R is the first distribution, so that is Taxable. The redeposit is moot, and the second 1099-R is the corrective distribution; these two offset each other for the tax year.

Read about Corrective Distributions.