Inherited 401k unknown to me until 7 years later...

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David3000
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Inherited 401k unknown to me until 7 years later...

Post by David3000 »

Hello all-

I've run into a good problem to have, but one that seems like it may come with some complications. I'll try to give the condensed version of the story:

Today I opened a random email from Fidelity with info about "required disclosures regarding my workplace savings plan". I did not currently have any accounts with Fidelity, but made sure it was legit and explored further. After registering my login info, I was astounded to see a 6-digit amount of money sitting in an inherited 401k with my name on it. After further phone inquiries, it looks as though my dad's previous employer recently switched from T. Rowe Price to Fidelity to manage their 401k. This Fidelity account was created Dec. 31 2019 when that change happened.

What is really weird to me was that my dad had kept good records of accounts as he was aware that his time was short. Pretty much everything was passed down as a Transfer on Death, which I took care of in a timely manner. This was in 2013. T. Rowe Price (and now Fidelity) had an old address listed for me, so I assume that's why I was never contacted via mail.

My question is:

How the hell is this handled tax-wise? I assume I am still on the hook for the RMDs over the past 7 years and the penalties that go along with that? Or does ignorance of the account get me anywhere? Any insight you tax pros may have would be fabulous. I will most likely seek the services of a CPA, but would love to hear from anyone who has any experience with this.
MotoTrojan
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Re: Inherited 401k unknown to me until 7 years later...

Post by MotoTrojan »

Sorry for your prior loss, but nice surprise none-the-less

Curious, what was it invested in during this period?
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prudent
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Re: Inherited 401k unknown to me until 7 years later...

Post by prudent »

Rather surprising that their first contact was via email. I can't figure how Fidelity was able to determine your email address when you had no accounts with them, yet they couldn't locate you through US Mail.
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David3000
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Re: Inherited 401k unknown to me until 7 years later...

Post by David3000 »

Unfortunately, the only records I have start Dec. 31, 2019 and it's in a money market fund.

Yes, the whole thing is very strange and I don't understand why it would be so difficult to track me down. The only thing I can think of was that my dad had other accounts at Fidelity that I inherited and eventually rolled over to Vanguard.
retiringwhen
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Re: Inherited 401k unknown to me until 7 years later...

Post by retiringwhen »

Not to be too paranoid, but did you create the login, etc. using links that were not from the email? For example, did you go to www.fidelity.com in a different browser window? I could just imagine a fairly elaborate phishing exercise. These days there are some very complex ruses.

Anyway, tax-wise, it is probably pretty straightforward as you will need to submit a request for waiver on the missed RMDs and then do some calculations to take distributions to catch you up to the current level. I am no expert, there are others on the forum who are intimately acquainted with this area.

A quick background would be to start here: https://www.investopedia.com/articles/r ... 011005.asp
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David3000
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Re: Inherited 401k unknown to me until 7 years later...

Post by David3000 »

Excellent, thanks for that article.

Yes, I was wary of some sort of phishing, so I made sure to call them. I also talked to T. Rowe Price on the phone and they were able to confirm that they transferred the funds to Fidelity on 12/31/2020.
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Re: Inherited 401k unknown to me until 7 years later...

Post by retiringwhen »

David3000 wrote: Fri Mar 06, 2020 4:14 pm Excellent, thanks for that article.

Yes, I was wary of some sort of phishing, so I made sure to call them. I also talked to T. Rowe Price on the phone and they were able to confirm that they transferred the funds to Fidelity on 12/31/2020.
:sharebeer
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Re: Inherited 401k unknown to me until 7 years later...

Post by mcraepat9 »

David3000 wrote: Fri Mar 06, 2020 4:14 pm Excellent, thanks for that article.

Yes, I was wary of some sort of phishing, so I made sure to call them. I also talked to T. Rowe Price on the phone and they were able to confirm that they transferred the funds to Fidelity on 12/31/2020.
? Time travel?
Amateur investors are not cool-headed logicians.
Duffus
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Re: Inherited 401k unknown to me until 7 years later...

Post by Duffus »

David3000 wrote: Fri Mar 06, 2020 4:14 pm Excellent, thanks for that article.

Yes, I was wary of some sort of phishing, so I made sure to call them. I also talked to T. Rowe Price on the phone and they were able to confirm that they transferred the funds to Fidelity on 12/31/2020.
Wow, they went foward in time!

Duffus
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David3000
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Re: Inherited 401k unknown to me until 7 years later...

Post by David3000 »

:oops:
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CAsage
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Re: Inherited 401k unknown to me until 7 years later...

Post by CAsage »

Yes, you need to catch up with the 2013-2020 RMD, and be grateful you had the stretch IRA so you will still have a big chunk left. From many prior posts on this subject, I believe a short letter to the IRS with an explanation will waive all penalties. Watch your estimated taxes for this year. I am very sorry that all that lovely money sat in a money market fund for 8 years of the biggest bull market.... Well, congrats anyway!
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Re: Inherited 401k unknown to me until 7 years later...

Post by celia »

CAsage wrote: Fri Mar 06, 2020 5:27 pm I am very sorry that all that lovely money sat in a money market fund for 8 years of the biggest bull market....
I would assume it sat in TRPrice funds until the December 2019 transfer to Fidelity liquidated it. OP, if you can verify this, inquiring minds would like to know. You will have to talk to the previous custodian anyways to find out the year-end balance (or, better yet, ask them what the RMD was for each year). If they were using your dad’s birth year instead of yours, you will want to re-calculate the RMDs using balances and your own divisors.
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Re: Inherited 401k unknown to me until 7 years later...

Post by retiredjg »

The IRS just wants people to take their RMDs. They are much less interested in penalties and are somewhat lenient on this particular issue if you do take the RMD that is required.

If you did not know about the account, do not be shy about asking for a waiver from the IRS regarding the RMDs.

Be sure to take them as soon as you can figure out how much needs to come out.

Good luck!

And shame on TRP for not taking more initiative in finding you. Or maybe they did and failed, but it sure seems like they didn't try very hard. How did they know your father died and not figure out some way to find you? That should not have been very difficult.
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Re: Inherited 401k unknown to me until 7 years later...

Post by not4me »

David3000 wrote: Fri Mar 06, 2020 3:23 pm
Today I opened a random email from Fidelity with info about "required disclosures regarding my workplace savings plan". I did not currently have any accounts with Fidelity, but made sure it was legit and explored further. After registering my login info, I was astounded to see a 6-digit amount of money sitting in an inherited 401k with my name on it.
I notice you said "current" account with Fidelity, so maybe you previously had one & they had your email? Anyway, since it was already setup as inherited, it would seem that TRP must have been the one to do that. If I were you, I'd be sure that it is titled right, your birthdate, et al are all correct. The 401k admin would be someone I'd engage for the historical info. I wouldn't rule out that a RMD check was cut, mailed to wrong address, and is now in a state's unclaimed property. Maybe not likely, but worth a look?

I agree that you have a good case to deal with the IRS. A CPA's credibility may be worth it.
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Re: Inherited 401k unknown to me until 7 years later...

Post by Alan S. »

How old was your father on his DOD?

401k plans contain beneficiary provisions indicating how non spouse beneficiaries need to distribute their interest.

The most common method is life expectancy.
But some plans, likely those of smaller employers, may indicate that the 5 year rule applies, OR the 5 year rule applies if the beneficiary does not opt out of it by the deadline. That deadline is the end of the year following the year of death.

Since you obviously did not make any kind of election by the deadline, Dad's age on the DOD is very important because the 5 year rule can only apply if Dad passed prior to his required beginning date (RBD). His RBD is 4/1 of the year following the year he reached 70.5 if retired. If he was still working after 70.5, the RBD is 4/1 of the year following the year he passed. With this info, you can advise whether he passed prior to or after his RBD.

If he passed on or after the RBD, your RMDs will be based on your single life expectancy (Table I) with the divisor based on your age at the end of the year following the year he passed. You would need to have the plan send you year end statements for all years starting with his year of death in order to determine what each year's RMD was.
NOTE: You are also responsible for Dad's year of death RMD if he did not complete it. And I echo what someone already stated that if TRP did not know your Dad had passed, they might have mailed an RMD check to him every year, but they certainly should have ceased once one of these was returned due to no forwarding address. You are fortunate that the entire account has not escheated to either Dad's or your state of domicile.

Fidelity, as plan administrator should be able to tell you whether the 5 year rule applies if Dad passed prior to the RBD. If the 5 year rule applies, you need to take a lump sum distribution, which is costly tax wise for 2020. Otherwise, you still need to take a large distribution if 8 years of RMDs are to be distributed this year, and you must make up all the RMDs before you can file Form 5329 to request the penalty waiver. You must distribute these late RMDs before you can do a direct rollover to an inherited IRA, but of course if the 5 year rule applies you won't be doing an IRA rollover.

With respect to the makeup RMDs and the penalty waiver, you need a properly completed 5329 for each year, but you do not need to write a detailed letter. Just state that you did not find out about the inherited 401k until xx/xx/2020. The IRS will surely grant the penalty waiver if you complete the 5329 forms correctly. Check the instructions for the form carefully because while there are only 4 lines to complete, what goes on 2 of them is not intuitive at all.
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Re: Inherited 401k unknown to me until 7 years later...

Post by Stinky »

OP, congratulations on your good fortune. What a pleasant surprise!

TRP sounds totally inept in not trying harder to find you.

I wonder how close you came to having the account escheated to the state. I have no personal experience with escheat, but what I've seen from posts on the Forum is that some states have shortened up the time before a dormant account is "escheated" to the state. Thankfully, that didn't happen to you.

If the funds had been escheated, they would have likely never gotten to Fidelity. So it would have been pure luck if you ever found the funds.

Once again, congratulations on your good fortune. Follow the advice of other responses to avoid IRS penalties.
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Re: Inherited 401k unknown to me until 7 years later...

Post by sport »

On the subject of escheatment: OP, you should check the unclaimed funds listings for your father in his state of residence. There may be other accounts unknown to you.
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David3000
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Re: Inherited 401k unknown to me until 7 years later...

Post by David3000 »

Thanks for the replies, all.

Just to answer a few questions for those who were interested:

I was able to get access to the closed account at T.Row Price and download all statements from when the account was created in my name in 2013. It was invested conservatively with about 25% Stock, 30% Bond, with the rest in a money market. So at least it saw some growth over the past 7 years.

I also discovered a 1099-R from 2018 indicating T.Rowe Price sold and distributed the full amount of the account and had 20% withheld for federal taxes/5% for state taxes. I'm assuming this was due to a five year rule that I missed out on (mentioned by Alan S. above)...my dad was 58 when he passed. This reduced amount presumably sat at T.Rowe Price in a money market fund until my dad's employer changed 401k administrators. Needless to say, I'll be on the phone with both companies again to get all the details. And will be finding a good local CPA to consult with.
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Re: Inherited 401k unknown to me until 7 years later...

Post by JediMisty »

David3000 wrote: Sun Mar 08, 2020 10:10 am Thanks for the replies, all.

Just to answer a few questions for those who were interested:

I was able to get access to the closed account at T.Row Price and download all statements from when the account was created in my name in 2013. It was invested conservatively with about 25% Stock, 30% Bond, with the rest in a money market. So at least it saw some growth over the past 7 years.

I also discovered a 1099-R from 2018 indicating T.Rowe Price sold and distributed the full amount of the account and had 20% withheld for federal taxes/5% for state taxes. I'm assuming this was due to a five year rule that I missed out on (mentioned by Alan S. above)...my dad was 58 when he passed. This reduced amount presumably sat at T.Rowe Price in a money market fund until my dad's employer changed 401k administrators. Needless to say, I'll be on the phone with both companies again to get all the details. And will be finding a good local CPA to consult with.
Good work! The folks here like Alan S are an incredible resource.
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Re: Inherited 401k unknown to me until 7 years later...

Post by furwut »

David3000 wrote: Fri Mar 06, 2020 4:47 pm:oops:
Don’t feel bad. I woke up this morning and was momentarily confused why it was so dark out still.
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Re: Inherited 401k unknown to me until 7 years later...

Post by Flora »

From the 2018 1099R comment from the OP, it sounds like the retirement account has been fully distributed out and there would be no inherited 401K account remaining, only a plain old investment account.

If so, amended 2018 fed/state returns may be in order with potential additional tax, interest, penalties due.
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Re: Inherited 401k unknown to me until 7 years later...

Post by Alan S. »

David3000 wrote: Sun Mar 08, 2020 10:10 am Thanks for the replies, all.

Just to answer a few questions for those who were interested:

I was able to get access to the closed account at T.Row Price and download all statements from when the account was created in my name in 2013. It was invested conservatively with about 25% Stock, 30% Bond, with the rest in a money market. So at least it saw some growth over the past 7 years.

I also discovered a 1099-R from 2018 indicating T.Rowe Price sold and distributed the full amount of the account and had 20% withheld for federal taxes/5% for state taxes. I'm assuming this was due to a five year rule that I missed out on (mentioned by Alan S. above)...my dad was 58 when he passed. This reduced amount presumably sat at T.Rowe Price in a money market fund until my dad's employer changed 401k administrators. Needless to say, I'll be on the phone with both companies again to get all the details. And will be finding a good local CPA to consult with.
Something very wrong here.
If the account was fully distributed in 2018 as indicated by this 1099R, it's very likely that it was escheated to the state. Which taxpayer is indicated on the 1099R, your father? Someone got credit for the 20% withheld, and if it was you then you would have received an unexpected tax refund for 2018 due to the withholding you were unaware of. In addition, 20% mandatory federal withholding does not apply to RMD distributions, another indication that this was an escheatment to the state.

If so, there wouldn't be any balance at all in your Fidelity account. You might be looking at some other account or some pre 2018 statement. Has someone at Fidelity confirmed to you that there is actually a balance in this account? Or might there be TWO accounts in play here? If you were not aware of this particular account in the past, not sure how it could have been retitled as an inherited account. Perhaps on these statements you are still seeing your Dad's account with you named as beneficiary, but the account was never actually retitled with you as the beneficial owner.

The IRS issued new reporting regulations for escheatment in 2018 (RR 2018-17) and this account might have been one of the first to get caught up in that. Therefore, unraveling this is going to take more investigation on your part to determine where this money actually is. Unfortunately, when an inherited account is not claimed promptly, all kinds of unanticipated consequences can occur, and once an account gets off track, a massive can of worms can result.
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David3000
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Re: Inherited 401k unknown to me until 7 years later...

Post by David3000 »

The 1099R was in my name, so the distribution was made to me.

I would also assume, like Flora, that since everything was distributed from the retirement account, what is left should be in a post-tax brokerage account. This does not seem to be the case from what I can gather online. The account at Fidelity is a 401k in my name (so I'm sure the titling of accounts got effed up somewhere), yet at the very bottom of the most recent statement it shows "Participant Status: Non Spouse Bene". This statement shows the current balance, so the money appears to actually exist.
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Re: Inherited 401k unknown to me until 7 years later...

Post by Alan S. »

David3000 wrote: Sun Mar 08, 2020 11:52 am The 1099R was in my name, so the distribution was made to me.

I would also assume, like Flora, that since everything was distributed from the retirement account, what is left should be in a post-tax brokerage account. This does not seem to be the case from what I can gather online. The account at Fidelity is a 401k in my name (so I'm sure the titling of accounts got effed up somewhere), yet at the very bottom of the most recent statement it shows "Participant Status: Non Spouse Bene". This statement shows the current balance, so the money appears to actually exist.
Never heard of this happening, but that 1099R might be in error and the funds were never actually distributed. I guess you never received the 1099R and therefore never reported it on your 2018 return, and yet never heard from the IRS either?

Does the Fidelity account have your correct address and SSN on it? Also, was the amount showing on the 2018 1099R in the same ballpark as the account balance showing on the statements and was the "Total distribution" box checked on the 1099R?

RMDs of course are not an issue unless there is actually an account balance, but if there is a 401k administrator must have the RMD distributed annually unless the 5 year rule applies. But if the 5 year rule did apply, the entire balance should have been distributed long ago, and you would be subject to annual beneficiary life expectancy RMDs, based on your age in the year after Dad's death.
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Re: Inherited 401k unknown to me until 7 years later...

Post by Flora »

Or, like Alan mentioned, the possibility of two different inherited accounts: one associated with the 2018 1099R and escheated to the state and a second one that was transferred to Fidelity.
informal guide
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Re: Inherited 401k unknown to me until 7 years later...

Post by informal guide »

One other comment that may be of help regarding taxation. If the account is still structured as an IRA and you take your distribution, you may want to consider doing significant tax withholding from the account distribution. IMHO, doing Federal (and if appropriate, state) tax withholding is easier than filing estimated tax payments. In addition, you should not assume that Federal and State taxation is the same for retirement account distributions, For example, in PA most retirement account distributions are not taxable (because contributions aren't deductible); in New York distributions under $25,000 annually are (if I remember correctly) are not taxable.
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Re: Inherited 401k unknown to me until 7 years later...

Post by Stinky »

sport wrote: Sun Mar 08, 2020 9:49 am On the subject of escheatment: OP, you should check the unclaimed funds listings for your father in his state of residence. There may be other accounts unknown to you.
I agree.

And you should probably keep checking every six months or so for a while to come.
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Topic Author
David3000
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Re: Inherited 401k unknown to me until 7 years later...

Post by David3000 »

Never heard of this happening, but that 1099R might be in error and the funds were never actually distributed. I guess you never received the 1099R and therefore never reported it on your 2018 return, and yet never heard from the IRS either?

Does the Fidelity account have your correct address and SSN on it? Also, was the amount showing on the 2018 1099R in the same ballpark as the account balance showing on the statements and was the "Total distribution" box checked on the 1099R?
No, I never received this 1099R and have heard nothing from the IRS as of yet.

The amounts all check out accordingly, so I don't think there's multiple accounts floating around (though I could be wrong). A search of the unclaimed funds list turned up nothing. From the distribution (minus taxes) to the new account at Fidelity, the balances correspond accordingly. My SSN is correct on both accounts.

On the 1099R, yes, the Total Distribution box is checked. So I am now very confused how the account at Fidelity would be anything other than an after-tax brokerage account.
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Re: Inherited 401k unknown to me until 7 years later...

Post by Alan S. »

David3000 wrote: Sun Mar 08, 2020 2:37 pm
Never heard of this happening, but that 1099R might be in error and the funds were never actually distributed. I guess you never received the 1099R and therefore never reported it on your 2018 return, and yet never heard from the IRS either?

Does the Fidelity account have your correct address and SSN on it? Also, was the amount showing on the 2018 1099R in the same ballpark as the account balance showing on the statements and was the "Total distribution" box checked on the 1099R?
No, I never received this 1099R and have heard nothing from the IRS as of yet.

The amounts all check out accordingly, so I don't think there's multiple accounts floating around (though I could be wrong). A search of the unclaimed funds list turned up nothing. From the distribution (minus taxes) to the new account at Fidelity, the balances correspond accordingly. My SSN is correct on both accounts.

On the 1099R, yes, the Total Distribution box is checked. So I am now very confused how the account at Fidelity would be anything other than an after-tax brokerage account.
That could be the answer. Perhaps the plan decided that the 5 year rule applied, so they made the lump sum distribution intended to go to a taxable account, but they messed up and somehow left the money in the inherited 401k. Conflicting with is the 20% withholding shown on the 1099R, which does not apply to RMDs. And since your account balance was net of withholding, the withholding had to be credited to your IRS tax paid in for 2018. You might check with the IRS to see if there is a credit there that was not refunded to you. After 3 years you cannot file a 1040X for a refund, but will be taxed on the current balance a second time when you actually distribute it as RMDs and receive the money.

When you indicated everything checks out, does that include the address shown on the account or 1099R? Not sure why you did not receive it if the address was listed correctly. Also, while the plan may have been felt pressured to get the RMD distributed, that would always be mailed to you, but if there was some reason the check was returned due to incorrect address, they may have intended to put the funds in a taxable account but messed up and left them in the inherited 401k.

That exposes the account to the beneficiary RMDs that were never distributed, notwithstanding the 1099R. That gets back to your original question regarding the RMDs, and perhaps you should request the late RMDs before the IRS gets involved with this. You would need to take the RMDs and file a 5329 for each year to request the penalty waiver, but I suppose you could still get an IRS inquiry over the 1099R, tax paid in surplus for 2018, etc.
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David3000
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Re: Inherited 401k unknown to me until 7 years later...

Post by David3000 »

You might check with the IRS to see if there is a credit there that was not refunded to you. After 3 years you cannot file a 1040X for a refund, but will be taxed on the current balance a second time when you actually distribute it as RMDs and receive the money.
I definitely will, and that is good to know about the 3 year rule.
When you indicated everything checks out, does that include the address shown on the account or 1099R?
No, this is where the problem stems from I believe. They had an address listed that I had moved from 2 years before my dad's passing. This old address was on the 1099R and followed the funds to the new Fidelity account.

Anyone have a rough estimate what a CPA will charge to deal with this mess?
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Re: Inherited 401k unknown to me until 7 years later...

Post by Alan S. »

You may need an enrolled agent (EA) more than a CPA. However, you probably will not be able to locate anyone who has dealt with this fact pattern, ie. a 1099R reported distribution when ONLY the withholding was actually distributed, not the rest of the account. I assume that occurred since you indicated the account balance appeared to drop by that 20%.

If TRP could even be convinced to rescind the incorrect 1099R, that still leaves the 20% floating around the IRS since it is apparently no longer in the account. There is also no way to know when the IRS will actually contact you about the unreported distribution on your 2018 return.

An EA would be the best at explaining this to the IRS, which is a huge communication challenge since the IRS probably never runs into this fact pattern either. The EA may be able to avoid a time consuming ping pong game with the IRS by determining how to get the withholding returned to you, perhaps in exchange for you catching up all the missed RMDs.

I think it was blind luck that this money did not end up in a state escheated funds account, because that was where TRP probably originally intended it to go. So you were 80% lucky, except for that 20% withholding. Maybe an EA will suggest that the withholding be moved to your 2020 withholding account, where you will need it if you end up making up all the late RMDs.

You could probably call Fidelity and ask them what the RMD obligations are. Since this is a 401k and not an IRA, the RMDs are a joint responsibility and Fidelity can face penalties if they do not distribute the required RMDs to you. So they should be very interested in addressing this. 5 year rule is still a possibility...……..you never said what Dad's age was on his DOD.

Most beneficiaries would have done a direct rollover of this account to an inherited IRA, however in this case that should wait until all these other questions are resolved and the RMDs made up through 2020.
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Re: Inherited 401k unknown to me until 7 years later...

Post by Flora »

OP did state that his dad was 58.
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David3000
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Re: Inherited 401k unknown to me until 7 years later...

Post by David3000 »

Thanks Alan S. for all of your responses. Here's the updated story since speaking over the phone with both brokerages.

The 401k at T.Rowe Price was subject to the 5-year rule, hence why it was fully distributed in 2018 (dad died in 2013 and was only 58). The check that was mailed out was never cashed (obviously I never received it), so the money (minus withholdings) was placed back into a Roth 401k since it was now after-tax funds. This account was then transferred to Fidelity on 12/31/19 and is still an inherited Roth 401k.

Given this story, am I wrong in thinking that making things right with the IRS shouldn't be too difficult? I would think an amended 2018 return would take care of the majority of the issue and then as long as I distribute enough to cover the RMDs for 2019 by the deadline (I am planning to just distribute everything to my Vanguard brokerage account), I should be good to go.

:confused
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Re: Inherited 401k unknown to me until 7 years later...

Post by Alan S. »

David3000 wrote: Tue Mar 10, 2020 10:44 am Thanks Alan S. for all of your responses. Here's the updated story since speaking over the phone with both brokerages.

The 401k at T.Rowe Price was subject to the 5-year rule, hence why it was fully distributed in 2018 (dad died in 2013 and was only 58). The check that was mailed out was never cashed (obviously I never received it), so the money (minus withholdings) was placed back into a Roth 401k since it was now after-tax funds. This account was then transferred to Fidelity on 12/31/19 and is still an inherited Roth 401k.

Given this story, am I wrong in thinking that making things right with the IRS shouldn't be too difficult? I would think an amended 2018 return would take care of the majority of the issue and then as long as I distribute enough to cover the RMDs for 2019 by the deadline (I am planning to just distribute everything to my Vanguard brokerage account), I should be good to go.

:confused
New issues - the 5 year rule makes perfect sense, however these funds should never have been deposited into any kind of 401k, least of all an inherited Roth 401k. The original 401k was not a Roth as the withholding indicates. These errors are bizarre considering the experience and expertise of TRP. I don't think Fidelity is complicit since they just inherited this mess when they became the administrator last year. You are still very fortunate because TRP probably should have made further attempts to locate you and if unsuccessful, escheated the account to the state. Fortunately, your money is still there, but it was distributed under the 5 year rule and should be in a taxable account since 2018, not in any form of retirement account. A distribution under the 5 year rule is taxable in the year distributed and definitely not eligible for rollover.

Not sure why the IRS has not been after you since they have that 2018 1099R. Maybe TRP rescinded it, or more likely the IRS is just behind as they have only had the 1099R for a little over a year. When they figure it out, they will want an amended 2018 return, although the withholding should cover some of the tax due. Underreporting penalties could become a problem, but perhaps you could get them waived under the circumstances, especially the one for substantial underpayment of income tax. However, the IRS might want to know how the account got re titled with you as beneficiary in the first place without you knowing about it. Perhaps TRP can explain that.

Again, to make this right you will have to request a full distribution of the account, but any 1099R Fidelity would issue would somewhat duplicate the 2018 1099R. You really owe the tax for 2018 on a 1040X, not for a 2020 distribution. But you cannot report anything until you can get Fidelity to understand that they need to correct the TRP error. One way to do that is to retitle the account as a taxable brokerage account or more likely to transfer the holdings or cash out to a new brokerage account in your name (NOT as beneficiary, but as the owner). You could then have Vanguard transfer it there if you do not want to keep it at Fidelity. Finally, Fidelity should not issue a new 1099R for 2020 since there was a 2018 1099R issued when the actual distribution was made. I can almost guarantee that whoever handles this at Fidelity has never dealt with this fact pattern before, and that is also true of the IRS. However, if Fidelity does as I suggested, the IRS would not have to understand what actually happened other than to the extent to waive any of your late payment penalties.

If you took the full distribution from the inherited Roth 401k in a normal way, you would surely get a new 1099R, although it would be interesting to see how they would determine the taxable amount when there is no record or prior Roth contributions. Fidelity would be happy to do this, but then you would have some real issues with the IRS with two 1099R forms out there for the same money. You certainly do not want to get taxed twice on the same money.

You could start with Fidelity and if all they will do is send you a distribution and 2020 1099R, perhaps you could then hire an EA to explain the whole thing to the IRS after gathering all documentation available. This could take awhile, a pot of money at the bottom of a can or worms. :?
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