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Inherited IRA Distributions Treated as Taxable

Funds paid directly to a non-spouse beneficiary aren’t eligible for rollover

In Internal Revenue Service Information Letter No. 2016-0062 (released Sept. 30, 2016), the IRS explained its treatment of two individual retirement accounts that a taxpayer’s deceased father had set up.  The taxpayer was the beneficiary of both IRAs and requested that the IRS allow a rollover of the amounts distributed, so as not to incur taxable income.  Unfortunately for the taxpayer, the IRS treated the IRA distributions to as taxable income.

Under Internal Revenue Code Section 402(b)(2), all amounts distributed from a retirement plan are taxable to the distributee in the year distributed.  There’s an exception under IRC Section 402(c), however, for amounts paid out of a retirement plan and rolled over into another plan.  Under Section 402(c)(11), any portion of a deceased employee’s IRA that’s paid in a direct trustee-to-trustee transfer to an inherited IRA established on behalf of a non-spouse beneficiary is treated as a direct rollover contribution.  However, any part that’s paid to a non-spouse beneficiary, which is what happened in the instant case, isn’t eligible for rollover.  Thus, the exception under Section 402(c)(11) didn’t apply.

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