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Mistitled Inherited IRA. Any recourse?


Philster
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My brother wasn't careful sending money from his Vanguard "Our deceased dad's name inherited IRA" to a new bank cd that is now titled "Brother's name IRA". He asked for the Vanguard check to be sent to new bank in his personal name. Went directly to them, not thru him. The bank he opened it in doesn't even offer inherited IRAs so he checked off "traditional ira" on application. Money was never comingled with his regular IRA elsewhere.

CD was opened 18 months ago, and Vanguard is indicating they aren't going to help. 

RMDs have been taken based on stretch method (dad died 4 years ago).

If we cant get banks to retitle is there any other recourse? Since IRS will be getting same tax from RMDs either way, would they even notice or care about title on the 1099 R? Thanks.

EDIT I believe there is a code 7 vs code 4 on 1099r indicating it is inherited vs traditional, but would IRS even look at that to compare to previous year, as long as correct rmd taken?

EDIT 2 he just noticed his Form 5498 from bank listed entire cd as IRA contribution for 2020, when the money came from vanguard. I assume my brother never even gave this form to our accountant.

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  • 2 weeks later...

He may want to write a letter to the bank requesting that they fix the title to his inherited IRA - {Brother}, beneficiary of IRA of {father} , deceased - and to fix the 2020 5498 to reflect the corrected title and not show the amount transferred as a 2020 contribution.   This way, he will have documented the problem and if IRS follows up on the 5498 reporting (that makes it look like he contributed too much to his IRA), providing a copy of this letter this can help explain what happened if it is not resolved by then. Also, needless to say, he should continue to take the RMDs required for an inherited IRA account.

IRS does look at the distribution code on the 1099-R (not just the distribution amount). If the wrong distribution code is listed in box 7 of 1099-R, you can ask the issuer of the 1099-R to correct it. If they do not issue a corrected 1099-R by the time your brother files his taxes, he may want to file 5329 with his return to let IRS know the 1099-R was issued with the wrong code and that the correct code is 4 (death) so that they will not assess the 10% additional tax for premature distributions.  

If the bank won't do what he asks to correct the IRS filings they made erroneously, consider looking for a better IRA custodian. (He may want to wait for the CD to mature to avoid a penalty for withdrawing from the CD before then). 

Good luck. 

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Sorry, never got an email about this response...and I don't see reply button so hope you see this. In the two weeks since my above comment, we have contacted our family attorney to do exactly the above, particularly redo For 5498 for 0 dollars instead of the whole cd, and also retitle the cd as inherited based on vanguard sending them the money as a trustee to trustee transfer of an inherited ira. Proof is that vanguard never issued a 1099 for that transfer, so it can't be a new IRA at another bank since it's logically still in a different IRA. At least we hope they agree. Thanks.

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