When an individual taxpayer inherits a traditional IRA from anyone other than their spouse, the taxpayer cannot treat the inherited IRA in the same manner as they can treat an IRA that they own otherwise. Moreover, an IRA which is inherited is subject to several limitations on distributions that are based on if the deceased owner died on or after the date that deceased owner was required to take minimum distributions from the IRA. If the deceased owner had not yet started to take required distributions, the designated beneficiary typically may need to take a distribution of the inherited IRA by December 31 of the fifth year following the deceased owner’s date of death (or under certain circumstances the designated beneficiary has to commence a plan of distribution based on the beneficiary’s life expectancy within that five year time period). See: Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs).
When a taxpayer receives a distribution from an inherited IRA, they should receive from the financial instruction a 1099-R, with a Distribution Code of 4 in Box 7. This gross distribution is usually fully taxable to the beneficiary/taxpayer unless the deceased owner had made non-deductible contributions to the IRA. However, a distribution from an IRA to a beneficiary that has been made due to the Death of the original owner is not subject to the 10% early withdrawal penalty, regardless of the age of the beneficiary or the deceased owner.
To enter a distribution from an IRA that has been made as a result of the death of plan participant into Keystone Tax Solutions Pro that is reported on a Form 1099-R – Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. with Code 4 in Box 7, from the Main Menu of the Tax Return (Form 1040) select:
- Income Menu
- IRA, Pension Distributions (1099R, RRB-1099-R)
- Select New and enter whether the Payee on the 1099-R is the Taxpayer or Spouse
- Enter the Payer EIN, Name and Address,
- Enter the Gross Distribution in Box 1 as it is shown on the 1099-R.
- The taxable amount in Box 2a should normally be the same as the amount from Box 1. When entering the Distribution Code in Box 7, since the Code is a 4, no further action is necessary upon exiting this menu. When the Distribution Code is a 4, the 10% Additional Tax for Early Withdrawal does not apply, regardless of the age of the designated beneficiary.
NOTE: This is a guide on entering Form 1099-R that has a distribution code of 4 into the Keystone Tax Solutions Pro program. This is not intended as tax advice.
Additional Resources:
Publication 575 – Pension and Annuity Income
Publication 590-B -Distributions from Individual Retirement Plans