Roth monies converted to Traditional Roth – in error HELP!
Last year some Roth IRA monies were inadvertently rolled over into a Traditional IRA at a different institution. Is there any way to reverse this transaction?
Some have mentioned an excess contribution removal but that doesn’t really solve the problem. I simply need to reverse the transaction and have these monies taken out of the Traditional IRA and rolled back to the Roth IRA. All accounts are still open and still have other monies in them, it seems simple enough but there doesn’t seem to be a clear answer.
Please help if you can!
Permalink Submitted by Alan Spross on Tue, 2011-04-05 19:23
Unless the second IRA custodian can be convinced to change the TIRA to a Roth IRA, it will probably take a letter ruling request asking the IRS for permission to recharacterize the rollover. There are no provisions in the tax code for doing so. At a cost of 10,000 plus legal, it is not worth the attempt unless the amount is significant.
I would be very surprised if the custodian would consider the above, but no harm in asking. Odds are even worse after custodian as filed all tax reporting forms for the rollover contribution.
Otherwise, you have a possibly taxable Roth distribution, an excess regular contribution to the IRA that must be corrected, and loss of future tax deferral on these funds. Since no deduction was taken for the rollover TIRA contribution, the corrective distribution will not be taxable except for the allocated earnings.
Permalink Submitted by Taylor Guess on Tue, 2011-04-05 20:08
Thanks Alan.
What if i just recharacterized the Roth back to an IRA?
The conversion from the TIRA to the Roth IRA happened in 2/10
Then some monies from the newly converted Roth IRA were transferred to another TIRA in 8/10
If i recharacterize the Roth back to a TIRA then it would fix most of the tax issues.
Your thoughts?
Permalink Submitted by Alan Spross on Tue, 2011-04-05 21:26
It would be nice, but since there is no provision to transfer Roth funds to a TIRA, there also is no provision to recharacterize such a transfer back to the Roth IRA. That is why you would need an IRS letter ruling to allow you to essentially recharacterize it back. It would be an IRS order to the custodians.
You cannot do it yourself because the custodians have no idea how to recharacterize it and they have no 1099R coding for reporting such a transaction to you and the IRS.
While it is extremely difficult to hold IRA custodians responsible for actions such as this, it may be possible if the custodian is 100% responsible for the error. Note that custodians have highly paid legal counsel and even a small amount of responsibility on your part for this error will absolve them from having to take responsibility. But the more fault that lies with the custodian, the more likely the IRS would rule in your favor. But there is usually no written documentation for who said what and when. Do you think you have case to go after the custodian and is the amount you transferred even worth the cost, time and effort?
Permalink Submitted by Taylor Guess on Tue, 2011-04-05 21:37
Alan,
Thanks for the post. What I actually meant was to leave the transaction alone, and simply recharacterize the Roth IRA back to a TIRA. The reason that this happened was that I had a TIRA and in 2/2010 it was converted to a Roth IRA. Then in 8/2010 monies were taken from this newly converted Roth IRA (it was formerly a TIRA) and put into another TIRA at another institution. (all accounts are still open and active) So, what I am thinking is to leave the transaction alone and simply recharacterize the Roth IRA back to a TIRA and then the transacation would simply be a rollover/transfer between TIRA’s. I know this is confusing, but this seems to be my only option without adverse tax consequences. I didn’t want to go back to a TIRA but this seems like the best option because of this erroneous transaction. Does that make sense?
Permalink Submitted by Alan Spross on Tue, 2011-04-05 22:42
Not exactly.
You can still recharacterize the amount of your conversion that is left in the Roth IRA, but I do not know if your August distribution removed some of the converted funds. But that does nothing for the distribution you already took out .
Also, your 2010 conversion must still be reported if you are not able to recharacterize all of it.
1) Was the conversion your first Roth IRA? If not, how much in regular contributions had you made in the past and how much in prior conversions?
2) How much was converted in Feb?
3) How much was transferred out in August? Did you get a 1099R for both both of these or just for the conversion? For the distribution, what is the code in Box 7?
Are you doing your 2010 taxes now? All these question are due to the fact that all these events are tied together and need to be reported very soon unless you filed an extension. And even then you are supposed to pay what you think you will owe. Were you going to defer your conversion taxes to 2011 and 2012?