Direct transfer custodial mistake
Last month, a direct transfer was initiated for both a T-IRA and R-IRA account to a new custodian. The checks were made out to the new custodian for deposit into the appropriate IRA accounts. Unfortunately, the check meant for the T-IRA was mistakenly deposited into the R-IRA account. The custodian was notified the day the mistake was made but it took them 6 days to rectify it. Due to the custodian’s own internal procedures, the T-IRA funds were withdrawn from the R-IRA, deposited first into a savings account, then promptly withdrawn and re-deposited to the T-IRA. The amount re-deposited to the T-IRA was for the principal only. At no time did the IRA owner have control of the money.
Questions: a) does the fact the T-IRA funds were deposited at all in a savings account have any consequence, i.e., could this technically ever be considered a once-every-12-month rollover (thereby preventing another rollover for the next year)? b) should the re-deposit to the T-IRA have included any interest (for the 6 days)? c) is there anything else to be aware of?
I appreciate your kind reply to my inquiry.
Permalink Submitted by Alan Spross on Thu, 2009-06-18 00:31
It appears that the custodian assumed responsibility for the problem as their error. Therefore, the corrective activity should not generate 1099R and 5498 forms as they otherwise would (eg. one for a Roth conversion). But this should be confirmed with the custodian ASAP to prevent surprises next January. Since no earnings were transferred back to the TIRA from the Roth, it appears they are not considering this as a recharacterization, which is good.
There could be a number of concerns depending on how the custodian plans to issue the above forms. But before contemplating a wide combination of possibilities, check with the custodian and if there will be no such forms issued, then there is no problem to worry about. With the direct transfer, there should be no 1099R and no 5498 issued at all for any of this.
If the custodian does plan to issue any forms, the battle should start now because it is much easier to prevent the forms from being issued than it is to try to get them rescinded next winter. Custodian are more flexible before the fact than they are once a situation calls for corrections.