ROTH account mistakenly rolled over to traditional IRA
I have a client who mistakenly rolled over a ROTH IRA account into a traditional IRA. This occured about 4 months ago. The custodian told me that since it was past a 30 day window it could not be undone. The custodian could try to recharacterize it back to a ROTH but felt it was a prohibited transaction that may cause problems with the IRS. She felt the only solution was to treat it as an excess contribution – taking the money out as cash and paying a penalty and taxes on any interest. Is there anyway to correct the situation?
Permalink Submitted by Denise Appleby on Thu, 2008-07-10 20:52
Wheat,
I know some of us use the terms rollover and transfer interchangeably. So, to be sure…was this done as a rollover or a transfer?
If it was done as a rollover , what type of paperwork was completed/signed by the IRA owner?
Did the paperwork clearly state the client’s intent to rollover the amount to a traditional IRA?
Permalink Submitted by Doug Wheat on Fri, 2008-07-11 12:22
Thanks for the reply Denise. The client transfered money from a ROTH cd held at a bank to the custodian. She indicated it was ROTH money on the form (by way of a check mark) but put down the IRA rollover account number.
Permalink Submitted by Denise Appleby on Fri, 2008-07-11 14:11
OK. That’s good news. As long as the paperwork completed was for a transfer, then the custodian should be willing to make the adjustments.
When you discuss the matter with the custodian, remind them that a transfer cannot me made from a Roth IRA to a traditional IRA, and as custodian, they should not permit such a transaction. Instead, they should have ‘rejected’ the transfer request. This is based on the tax code and the transfer rules (ACAT, NON-ACAT). As such, they are partially responsible for this error and must work with the client to make the necessary adjustments. The request should be submitted in writing. Be sure to include an explanation of how much it will cost the client if they refuse to fix their mistake.
Permalink Submitted by Doug Wheat on Fri, 2008-07-11 15:30
Thanks Denise. We will try that approach.