We have a customer who passed away 3/2010 and her daughter was beneficiary. The daughter set up a beneficiary IRA. Shortly after, the daughter passed away in 2010. Her husband was the beneficiary on her beneficiary IRA. He did not do anything with the IRA and it's still on our sysem under her name and TIN. He received a 1099R and wants to know why. The 1099R is on distributions right? The only thing in the account is the money she received from her mother's IRA which she used to open the beneficiary IRA.

Thank you

You said the son-in-law received a 1099R, but in the fact situation you describe that should be impossible. Whose name and SSN is the 1099R in; i.e. the daughter or the son-in-law?

I apologize. It was in the daughter's name and TIN.

Then look to see if the IRA in the daughter's name showed the funds coming in as a "rollover." If so, a 5498 in her name and TIN will be generated at the end of May.

The IRS computers will see the funds coming out (1099R) and they will see them coming back in (5498) and realize there was no liability on the part of the daughter. The surviving spouse will need to give the 1099R to his tax preparer for 2010 and to tell him the 5498 will arrive later.

If it's as described above, there will be no tax liability on the part of the decedent or her surviving spouse.

Actually this doesn't sound so good. A non-spouse beneficiary cannot rollover funds taken from the deceased's IRA. If the daughter took a distribution from her mother's IRA, as the beneficiary, then that pretty much ends the process. The daughter could not rollover the funds to a beneficiary IRA.

Are you absolutely certain that the 1099-R isn't for the mother's mandatory distribution that needed to be taken before the funds were transferred into the beneficiary IRA?

A transfer, not a rollover, is the preferred practice and the one mentioned in Publication 590. However, you might want to provide some support for the statement that a rollover to a payout account is prohibited.

Hello Ken, please refer to pages 24 and 25 of Publication 590:

"If you inherit a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution."

This has been standard knowledge for as long as I have worked with IRAs (1998). What is allowed are Direct Rollovers from employer sponsored plans to an inherited IRA, being that there is no transfer option from qualified plans to IRAs.

Thanks, but I think I already referenced the language in 590. Since you seem to think it makes a difference, add 20+ years to your IRA experience and that's where I am...

They're saying that you cannot roll an iherited IRA over into an IRA in your own name. They are not saying you cannot roll it over into a payout IRA. As noted, the transfer is the preferred and the easiest method, but which route it takes on the way to getting into a properly titled account is irrelevant.

The question did not involve a qualified retirement plan.

It looks like we will have to agree to disagree.

From IRS: Inherited from someone other than spouse.

If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.

Like the original owner, you generally will not owe tax on the assets in the IRA until you receive distributions from it. You must begin receiving distributions from the IRA under the rules for distributions that apply to beneficiaries.