Bank Error on IRA Contributions
An individual went to Wachovia to setup an IRA in 2009. Although she told him that her employer wanted to contribute as part of a SEP and she also wanted to make contributions, Wachovia told her she should setup a Roth IRA and put it in place for her. After a few months she noticed the problem and setup a traditional IRA with them. The advisor there told her he would take care of fixing everything, but he didn’t. They continued to draft contributions to the Roth instead of making them to the traditional IRA. For months, she tried to resolve the issues with the advisor. During 2009 they managed to move a small amount from the Roth to her traditional, but kept drafting contributions to the Roth. Finally in February, 2010, they moved the money from the Roth to the Traditional and she thought she was set. She has now received a 1099 for a non-qualified Roth distribution for 2010 for the total amount plus earnings that was moved to the Traditional IRA. Shouldn’t there have been a way for Wachovia (now Wells Fargo) to move the dollars without the client incurring a tax liability/penalty since they made the error? What action do you recommend she take at this point? Thank you for your help!
Permalink Submitted by Jose Morales on Wed, 2011-02-02 18:59
Start by gathering the actual documentation for the account opened. You should have a Traditional IRA Application/Disclosure. It sounds like funds were being drawn from another account to make contributions, so there should be a Contribution Instructions form that was signed to not only authorized the contributions but to document the type of contributions being made.
This should be all you need to prove an error was made when the Roth account was opened and Roth contributions were made. It should then be very easy for Wells Fargo to see their mistake and make the necessary corrections.
Permalink Submitted by Alan Spross on Wed, 2011-02-02 20:10
What is the code in Box 7 of that 1099R?
Permalink Submitted by Michele Meyers on Wed, 2011-02-02 20:14
T. It also has the box checked that says Taxable Amount Not Determined in 2b.
Permalink Submitted by Alan Spross on Wed, 2011-02-02 21:01
Well, that pretty much makes it obvious that the bank and advisor did not know what they were doing. The T coding indicates a distribution rather than recharacterization even though this was apparently done within the time limit for recharacterizing the contributions.
If a taxpayer makes regular TIRA contributions to a SEP IRA, they may not be deductible since they are participating in an employer retirement plan. And if they cannot deduct these contributions, a Roth IRA is a better choice. Perhaps that is why the Roth was established in the first place. After that it sounds like a massive breakdown of communications. As it stands now, the distribution is not taxable unless she already withdrew all her regular and conversion contributions to her Roth(s), and there is no penalty since she is over 59.5. But she does lose the net contribution for 2009 the way this was handled.
If the individual contributed to this problem in any way, that would be a major blow to the chances of correcting this two years down the road.
Permalink Submitted by Meggy Brookson on Fri, 2011-02-04 18:49
Have you tried taking action on this situation? If they made the error continuously then the person should not be penalized for the mistake. However, it is important to show that there was effort made in fixing the issue and that they had originally messed up what was intended to be set up. Get all of the paperwork together and organized and it should be able to be figured out since it was not you at fault.
Permalink Submitted by Michele Meyers on Mon, 2011-02-07 12:51
Thank you. I have had the client provide me all the documentation and I think I have what I need from her to go back to the bank. She keeps great records!