Errorneous IRA registration
Our client intended to establish a Roth IRA in 2003. She made one contribution in April before the tax deadline and allocated a $7000 contribution over two tax years (2003 and 2004). The broker dealer paperwork we completed indicated it was to be a Roth but on the mutual fund application “Traditional IRA” was checked, so that was how the fund company set it up. This error was not caught until recently.
No deduction was taken for these contributions on her return because she thought she established a Roth. The client will be 59 in August. The fund company suggested an “Internal” conversion to get the right registration but they were going to issue a 1099 and let us explain the error to the IRS when taxes were filed. Not sure of the best approach but didn’t like the sound of that remedy. Also didn’t want this to be a non-deductible traditional IRA. Is this something they can correct on their end if we provide them with our broker dealer documentation or is there a better remedy?
Permalink Submitted by Al Fry on Fri, 2008-07-18 01:38
Does she have any other IRAs, incuding SEPs? If not, and if her income allows, she could simply convert to a Roth, and she would only be taxed on earnings. She would need to file an 8606 for each year to establish cost basis. If her income is too high now, she could convert to a Roth in 2010, when the $100,000 MAGI threshhold goes away.
Permalink Submitted by [email protected] on Fri, 2008-07-18 14:10
She has a traditional IRA. It’s value is about 3/4 the value of the Roth. Are you thinking this IRA would be considered a traditional IRA with after-tax contributions? If that were the case when we converted wouldn’t we have to consider the zero cost basis of the pre-tax IRA along with the cost basis of this IRA in calculating the taxable amount? In other words we would have to consider all IRAs in calculating the taxable amount?
Permalink Submitted by Al Fry on Fri, 2008-07-18 16:35
You got it!