Accidental transfer of ROTH account to TRADITIONAL IRA
Seemingly the result of administrative error at the originating fund company [paperwork was filed correctly], a client recently had both his Traditional IRA and his Roth IRA accounts transferred to a single Traditional IRA at a new custodian. Clearly that’s the wrong direction. The transfer occurred in September of 2009.
Ignoring for a moment that the client did not wish to turn after-tax assets into pre-tax assets, nor pay any additional taxes at present, [b]would such a transfer be permitted?[/b] Or, may Roth monies go into a Traditional IRA only as a result of recharacterization of a previous conversion (which did not, in this case, take place)?
Permalink Submitted by Alan Spross on Wed, 2010-02-10 03:43
You are correct that the only way Roth assets can transfer into a traditional IRA is through recharacterized contributions or conversions. Since this is not allowed under the tax code and there is no way to report it, the new custodian should be asked to rectify the error regardless of who was responsible. This may be more difficult now that so many months have passed and is a reminder the taxpayers should suspense all such tranfers for the correct confirming paperwork. These errors are more easily corrected if caught promptly. Copies of all supporting documents should easily expose the error and need for correction.
There should be no 1099R or 5498 forms reporting contributions since these were TT transfers, so the IRS should not have incorrect documents at this point unless there is a statement of year end value used to compute RMDs and client is subject to RMDs. So I would get all supporting documentation with a letter requesting correction of the IRA types to the new custodian ASAP.
Permalink Submitted by Anonymous (not verified) on Wed, 2010-02-10 05:06
alan is right. You need to fight this battle. The custodian at fault should be able to fix this with a “letter of indemnity” which is a common back office procedure. I would take this up with the next management level, if you get no results.
pko
Permalink Submitted by Matthew Clement on Thu, 2010-02-11 20:17
Thank you. If such a transfer is technically not permitted, the IRS is unlikely to complain about its correction.
I’m wondering, since the security itself was sold after transfer, if it’s the dollar amount that needs to be transferred back to the Roth. Since there is no other amount to use, that’ what I’ll go with.
Permalink Submitted by Anonymous (not verified) on Thu, 2010-02-11 20:32
I don’t see a problem with the company making the correction just to reregister the transactions under the Roth. Custodians will have their way of rebooking everything so I would trust them on that. A lot times you will just see many lines of history added to make this happen. Everything you did will still happen, just under the Roth registration.
pko