Error by Brokerage Company when opening IRA
For Tax Year 2024, my son was told by Vanguard broker he could open a traditional IRA with $7,000 investment AND a ROTH IRA with a $7,000 investment. He opened both accounts and funded them from existing savings. After weeks went by, Vanguard had only opened the Traditional IRA and when he contacted them to ask why the ROTH was not funded, they informed him that ROTH could not be funded because he was limited to an overall cap of $7,000 annually. He was never informed before they opened Traditional IRA and had he been, he would have chosen ROTH over traditional IRA. Vanguard was contacted about their error and corrected it by doing a ”ROTH Conversion”.
Son received 1099-R showing gross distribution and taxable amount close to the total $7,000 funded for the Traditional IRA.
on 1099-R, LINE 2b is (X) and total distribution is ( ). LINE 7 Distribution Code is 2 and IRA/SEP/SIMPLE is (X)
This was not an IRA distribution but Vanguard’s error.
How does this get handled on my son’s Tax Return? Does Vanguard need to produce a form correcting what was reported to the IRS on Form 1099-R so he is not taxed on the amount reported on the 1099-R or is there another way to ensure he is not taxed on this?
Permalink Submitted by Alan - IRA critic on Mon, 2025-04-14 18:57
VG should have recharacterized the TIRA contribution as a Roth contribution providing that son’s income is not too high to qualify for a Roth contribution. It also sounds like there were some communication issues between VG and your son.
Now that the 1099R has been issued, there is no way that they will amend it. In fact, most likely the minute the conversion was done this was locked in, even if son would have called them the next day. Now if your son specifically requested that the contribution be recharacterized and VG has this on a recorded line, that might improve the chance, but even if VG totally mishandled a conversion request, they are likely to maintain that this should have been brought to their attention right away, not after 1099R forms were issued to your son and the IRS.
As for the TIRA contribution, if it was deductible, the deduction will offset the conversion income. If it was not deductible, then Form 8606 should be attached to the 2024 return showing a non deductible contribution. Note that is son had no TIRA before this, and the contribution was not deductible, the conversion would then be mostly tax free as well.