recharacterization from a Traditional IRA back to a ROTH
I have a client who made a mistake and moved money in a ROTH IRA in a bank to a Traditional IRA at a brokerage firm. The form she submitted has a ROTH indicated but she put down account numbers of a Traditional IRA. The brokerage firm says the money cannot be recharacterized back from the Traditional to a ROTH and that it is an excess contribution that needs to be taken out of the IRA with penalties on earnings. Is there another approach to this situation that would allow the money to stay in a qualified account?
Many thanks.
Permalink Submitted by Alan Spross on Thu, 2008-09-18 16:18
When was this done? Large or small amount? There are no pleasant solutions to this unless the brokerage firm will indemnify her to some extent, and that is unlikely unless she has substantial assets there that she can threaten to transfer out. Since she contributed to the error by entering the wrong account number, the firm will probably decline any assistance.
They are correct about the excess contribution to the IRA, at least to the extent she is unable to make a regular contribution. She will also have to report the Roth distribution on Form 8606 and that may be partially taxable and/or penalized depending on the details of her Roth contributions, conversions and earnings.
The first two questions above may affect any additional suggestions, such as the viability of pursuing an IRS letter ruling.
Permalink Submitted by Doug Wheat on Thu, 2008-09-18 17:25
The money was moved from a ROTH to a Traditional IRA in April. The amounts were about $8,500 for one person and $9,000 for the other.
Thanks.
Permalink Submitted by Alan Spross on Thu, 2008-09-18 18:40
Those amounts do not seem large enough to justify the cost of a PLR request, or two requests. But they are small enoungh that if client is eligible for a 2008 contribution, only amounts in excess of that contribution would be excess contributions subject to correction. And with the markets as they are, there is probably not much in the way of earnings allocated to the excess amount that would be taxable.
If the client make the failed rollover prior to 4/15 and if no 2007 IRA contribution was made, the client may be able to use both years 07 and 08 to assign the regular contribution, and/or have one or both recharacterized to a Roth IRA contribution if income eligible. That would keep the funds in one or the other form of IRA, even though a Roth distribution still must be reported for 2008.
Permalink Submitted by Doug Wheat on Thu, 2008-09-18 21:10
Thanks for the suggestions, I will look into them. All the best. Doug