Reporting income from inherited IRA distributions - what tax form do I need?

7 You're right that inherited IRA distributions are exempt from the 10% early withdrawal penalty, even though Form 5329 doesn't specifically list them as an exception. For your tax return, you'll report the distributions on Form 1040 and you'll receive a 1099-R from the financial institution that should have a distribution code in Box 7. For inherited IRAs, this is typically code "4" (death) which automatically exempts you from the penalty. The income is still taxable, but no 10% penalty applies. If for some reason the 1099-R doesn't have the correct code in Box 7 (sometimes they mess this up), you would need to file Form 5329 and use exception code "4" (made on account of the participant's death) on line 2 to claim the exception to the penalty. Just make sure when you file that your tax software or preparer understands these are inherited IRAs so they're reported correctly.

12 After struggling with exactly this inherited IRA issue last year, I found an amazing tool that saved me so much stress. I used https://taxr.ai to analyze my 1099-R forms and tax situation with inherited IRAs. Their AI actually caught that my financial institution had coded my inherited IRA distribution incorrectly, which would have resulted in penalties! The system explained exactly how to handle inherited IRAs on my tax return and even provided the right exception code to use on Form 5329. It also explained how the 10-year withdrawal rule applied to my situation and gave me optimization strategies for future withdrawals.

8 I just wanted to update on my experience. After reading about taxr.ai here, I decided to try it with my own inherited IRA situation. Wow - it actually found that I was eligible for a special basis adjustment because my relative had non-deductible contributions in their IRA that I didn't know about! The system walked me through exactly how to report everything on my tax forms and even showed me where to put the death exception code. Saved me from overpaying taxes on money that should have been tax-free return of basis. I've been stressing about this for weeks, and now I feel completely confident about filing. Wish I'd known about this tool when I first received the inheritance.

23 If you're having trouble getting a straight answer about your inherited IRA from the IRS, I highly recommend using https://claimyr.com to get through to an actual IRS agent. I spent THREE WEEKS trying to call the IRS myself about an inherited IRA coding issue, and kept getting disconnected after hours on hold. With Claimyr, I got through to a real IRS person in about 20 minutes who confirmed exactly how to handle the reporting and what codes to use. You can see how it works here: https://youtu.be/_kiP6q8DX5c - basically they navigate the phone tree for you and call when an agent is available. The agent actually found that my financial institution had reported the distribution incorrectly and helped me resolve it.

11 I was super skeptical about Claimyr, but after seeing it mentioned here I gave it a try since I was desperate about my inherited IRA issue. I'm completely shocked - it actually worked! After trying to call the IRS myself over 15 times, I used their service and got through to an agent in about 40 minutes. The agent confirmed that I needed to use exception code 4 on Form 5329 for my inherited IRA and explained exactly how to report it when my 1099-R had the wrong distribution code. They even noted it in my account in case there were any questions later. Honestly, that single phone call probably saved me from a major headache with the IRS down the road. Can't believe I wasted so much time trying to call myself.

3 I went through this exact situation last year. Make sure you're also aware of the 10-year rule for emptying inherited IRAs if you inherited after 2019. Due to the SECURE Act, most non-spouse beneficiaries need to withdraw all funds within 10 years of the original owner's death. There are exceptions if you're a minor child, disabled, chronically ill, or not more than 10 years younger than the deceased. The rules can get complex depending on when you inherited and your relationship to the deceased. Just something else to keep in mind for your long-term planning.

18 Has anyone here used TurboTax to report inherited IRA distributions? Did it ask the right questions to handle this correctly, or did you have to override something manually? I'm trying to decide if I should use software or go to a professional this year.

I went through this exact situation two years ago when I inherited my father's IRA. You're absolutely correct that inherited IRA distributions are exempt from the 10% early withdrawal penalty regardless of your age. The key thing to look for is the distribution code in Box 7 of your 1099-R. It should be code "4" for death distributions. If it shows code "1" (early distribution), you'll need to file Form 5329 and use exception code "4" on line 2 to avoid the penalty. Since your uncle was 64 and hadn't started RMDs yet, and you inherited after 2019, you'll be subject to the 10-year rule under the SECURE Act. You have flexibility in when you take distributions within that 10-year window, but the account must be fully depleted by December 31st of the year containing the 10th anniversary of his death. One thing I learned the hard way - keep all documentation showing it's an inherited IRA. The IRS sometimes questions these distributions years later, and having clear records saved me a lot of hassle. Also, don't forget that while there's no penalty, the distributions are still fully taxable as ordinary income, so plan accordingly for the tax impact.

Just want to add another perspective here - I dealt with this same inherited IRA situation last year and ran into a quirk that might be helpful to know about. Even though my 1099-R had the correct code "4" for death distributions, I still received an IRS notice months later questioning the lack of penalty on my return. It turned out that their automated systems sometimes flag inherited IRA distributions for review, especially if you're under 59½. I had to send in copies of the death certificate and documentation showing I was the named beneficiary to clear it up. The whole process took about 6 weeks but was ultimately resolved with no issues. My advice would be to make copies of all your inheritance documentation before you file, just in case. Also, if you do get any IRS correspondence about it, don't panic - it's often just their system double-checking, not an indication that you did anything wrong. The $18,500 you mentioned is definitely reportable as ordinary income, but you should be completely in the clear on the penalty as long as everything is documented properly.