Can a non-spouse beneficiary "un-do" a distribution made out

[Guest J. Russell Armstrong]

A friend inherited an IRA from his father (died prior to his required beginning date) and upon the advice of his broker, he distributed out the entire IRA in August 2000. Now that he has learned about the tremendous tax deferral benefits he could have enjoyed over his 39.6 year life expectancy, he wants to put the money back into the decedent IRA. Due to the large amount of money involved, the IRA provider has agreed to take the money back into the account and have the beneficiary complete new death claim paperwork. I believe the company will still send out a 1099r in January and will also send another form (5498?) showing the money going back into the IRA.

I do not know of any instance where this type of transaction is allowed by the IRS. (No non-spousal rollovers) Supposedly there are Private Letter Rulings (2000-28040 & 28041 of 4/18/2000) that address this exact example but I have been unable to locate a source to view them.

[BPickerCPA]

Your friend has a big problem. First of all, the letter rulings cited have nothing to do with your question.

Second, there is no legal authority for putting the money back into an IRA, especially if the broker is going to issue a 1099R and 5498. That will notify the IRS what happened and will add a 6% excise tax for excess contributions, on top of the other problems.

You should not do this without the IRS' blessing via your own letter ruling. I doubt you will get it, but it may be worth a shot. You should know that there are cases pending that are trying to hold brokers responsible for the erroneous information such as was given here. I would look into that possibility. The advice the IRS provider is giving now sounds like they are trying to cover their own behind. Talk to a real IRA pro and see what should be done.

Barry

[Guest Paul Leslie]

Barry

I have agree with what you said. I don't see the IRS giving a favorable letter ruling based on the fact that the only thing the taxpayer could say is I got bad advice. The IRS has allowed this arguement in certain situations, but I don't believe the IRS will allow that in this situation. They (the IRS) would not want to set any kind of precendence that the taxpayer is held unaccountable for his or her actions. What the taxpayer did was totally legal and he should have been aware of his own tax situation to act appropriately. I know this sounds harsh but no court is going to rule against the IRS in this situation.

If this was still within the 60 days, the taxpayer could ask the rollover to be treated as trustee to trustee transfer. That would contradict previous letter ruling and such but that would be at least an arguement even if it is weak and hoping on a prayer.

I know this doesn't sound like a good thing but who knows what the future would have held. If that money was left in the account and it doubled every 3 to 4 years, that taxpayer would still pay a lot of taxes and if the taxpayer is always in high bracket then it may not of mattered when the money was taken out. In that case it would be good to get it out of the IRA so the growth would get capital gain treatment instead of ordinary. I am not defending the broker (because it sounds like he gave tax advice when he shouldn't have been) but no knows the future and so it is hard to say who was wrong in this situation because everything was done according to the Internal Revenue Code.

It can't hurt to run it by an lawyer.