roth IRA transfer mistakenly put as IRA

Submitted by Douglas Bauerband on Fri, 2019-12-06 20:56

Client had Roth IRA with Pershing account. We transferred out $20,000 to Midland account.

a. mistakenly put on the Midland appl that is was an IRA instead of Roth IRA transfer in 2013.
b. No money was added to the account since 2013
c. We found the mistake on an internal review of accounts in Sept of 2019.
d. We sent to Midland all the proof that the transfer company was a Roth IRA. Statement from Pershing with account number and account name as Roth IRA FBO.

Midland will not change the account over to the Roth IRA. They say it’s been too long and want us to do a recharacterization which will be a taxable event. They say they checked with the IRS.

1. Are they correct?

or…

2. is there anything we can do other than what they say to correct this account back to a Roth IRA? (any help at all) IRS codes or anything?

Thank you
Douglas



Submitted by Alan - IRA critic on Sat, 2019-12-07 00:31

  • Midland’s response was typical in this situation. This type of error must be discovered quickly and reported, usually prior to the end of the calendar year in which the error was made. Custodians are sometimes willing to correct this type of error if it is 100% clear what went wrong, but more so if they contributed to the error. In this case 6 years has passed and the custodians do not appear to have contributed to this.
  • The rollover to a TIRA does not meet the definition of a rollover contribution in Sec 408(d)(3) as the transfer did not come from a TIRA. Therefore, what happened is a distribution from the Roth IRA and an excess regular contribution to the Roth IRA to the extent the 20,000 exceeds the allowed Roth contribution allowable in 2013. Client may be able to avoid reporting the Roth distribution on Form 8606 since 2013 is a closed tax year, but the current Roth basis has been reduced by 20,000. The excess TIRA contribution will generate a 6% excise tax for 2013 up though 2018 to the extent the excess cannot be applied to a later year using Form 5329. The 5329 also computes the annual 6% excise tax. Therefore if none of the 20,000 can be applied to a later year there will be 6 years worth of 6% excise taxes plus the IRS will bill late interest. If this exercise can be completed in time to withdraw the remaining excess that was not applied through 2019, there will be no excise tax due for 2019. The custodian should report the distribution of the remaining excess amount on Form 1099R with Box 2a blank (no taxable amount), the taxable amount not determined box should be checked in 2b, and Box 7 should be coded 1 if client is not yet 59.5 and 7 if he is. No earnings calculation or withdrawal is done since this distribution is well beyond the due date. And since no deduction was taken for this TIRA contribution, there should be no income tax due. The 1099R coding is described in the 1099R Inst, p 12 under (Traditional, SEP or SIMPLE IRA). Finally, this is NOT a recharacterization, it is the removal of an excess TIRA contribution after the due date. On this note Midland is incorrect, and I doubt that they checked with the IRS.
  • If none of this excess can be applied as TIRA Contributions for 2013-2018, the 6% excise taxes are 1200 a year for 6 years or 7200 plus late interest to be billed by the IRS. If client made the max TIRA or Roth contributions for these years, then none of the excess can be applied on Form 5329, although if a 2019 contribution was made it could be returned with earnings to enable 7000 (over 50) of the excess to be applied to 2019.
  • This is the only way to eliminate the excess TIRA contribution and excess contributions have no statute of limitation, so the 6% could be levied for later years if this is not cleared up. Again, there is time to eliminate whatever excess remains by a distribution before year end and prevent a 2019 excise tax. 

Submitted by Douglas Bauerband on Tue, 2019-12-10 21:41

She already had a Roth IRA for over 10yrs.  We transferred 20k out to another Roth for diversification.  The application was checked an IRA instead of Roth IRA.  There where no more contributions or withdrawals to the 20k with Midland since 2013 transfer.  They should just change the account title to a Roth due to the mistake. There was never any excess contribution.Yes, it has been a long time since 2013 but its just a title on an account and no reporting to the IRS as it was a transfer not a contribution.Can’t we just write a letter to the IRS and explain what happened?  Is there an IRS address that we should address the letter to? Thank you.

Submitted by Jose Morales on Wed, 2019-12-11 17:23

Alan is correct.  Due to the failed transfer what actually occurred is a distribution from the Roth and an excess contribution to the Traditional IRA.  If caught in time the excess contribution could have been withdrawn and the funds put back into a Roth as a rollover.  If you want to explore any avenue with the IRS a written determination that extends the 60 day rollover period for moving the funds back to a Roth may have a slight chance of being granted by the IRS.  If you aren’t familiary with submitting a request for a written determination from the IRS, it’s best to find someone who is familiar with the process that can write and submit the request for you.  You need to cite the IRC sections that are relevant to your arguement and lay out all the facts and circumstances. The most likely case is that you will have to follow the course that Alan laid out.

Submitted by Alan - IRA critic on Wed, 2019-12-11 00:20

The deposit to the TIRA is an excess contribution because a Roth is not eligible to be rolled over to a TIRA. That results in a Roth distribution and a regular TIRA contribution according to the rules. Yes, if Midland agreed to re title the TIRA as a Roth IRA retroactive to the account opening, it would solve all these problems, but it is normal for a custodian to refuse to do that given the time that has passed and the fact that they were not totally responsible, even though they should have have noticed the source of the transfer as a Roth and stopped the transfer at that time.  Therefore, continued effort to get Midland to change the IRA type to Roth is very likely a waste of time. As for taking this up with the IRS,  they are not aware of any problem at this point because there was no 1099R or 5498 issued in 2013.  The IRS would want any change to be made through the custodian, knowing full well that the custodian is not likely to make such a change now. But this would alert the IRS to the problem and then client would be forced into the correction process to avoid years of excise taxes. If client does nothing he is rolling the dice that the only downside will be the double tax on the 20k once RMDs begin, and single tax on any gains on that 20,000. Obviously, no real good choices exist.

Submitted by David Mertz on Wed, 2019-12-11 03:27

It doesn’t seem possible to just retitle the account at this point.  Midland correcting the titling of the account now to show it as being a Roth IRA would imply that Midland made a mistake that would require Midland to issue corrections to all of Forms 5498 previously issued for this account.  Although there would have been no Forms 5498 showing any kind of contribution, there would have been Forms 5498 for 2013 through 2018 filed with the IRS showing the existence of the account, its FMV and with the Roth IRA box *not* marked, and that marking would need to be need to be corrected.  Filing such corrections might cause Midland to incur penalties ($270 for each of the eight Forms 5498 for a total of $2,160, I think, unless Midland can establish reasonable cause).  I don’t see it happening.

Submitted by Douglas Bauerband on Wed, 2019-12-11 20:05

You mentioned to find someone to write the letter.  Any recommendations?Thank you.

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