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 that 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 reported on a Form 1099-R with code 4 in Box 7, from the Federal Section of the tax return (Form 1040) select:
- Income
- Form 1099-R, RRB, SSA
-
Add or Edit a 1099R
- Whose form is this? - Select Taxpayer or Spouse.
- Payer Information - Enter the payer EIN, name, and address.
- 1099-R Information - Enter the Box 1 Gross Distribution as shown on the 1099-R. The amount in Box 2a is typically the same amount. Enter 4 in Box 7 Distribution Code(s).
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 TaxSlayer Pro program. This is not intended as tax advice.
Additional Information:
IRS Publication 575 - Pension and Annuity Income
IRS Publication 590-B -Distributions from Individual Retirement Plans