late recharacterization
Was at Ed’s seminar in Hartford CT summer 2010 and converted a SEP IRA to 2 separate Roth accounts. Thought recharacterization could be done until year’s (2011) end and did not accomplish it by the October deadline. Original amount in this specific account converted was $75041.79. Recharacterization amount was $65769.08. Just found out from my accountant that 2010 tax liability cannot be changed, thus I just should never have recharacterized when I did (December). Can the recharacterization be reversed to just get back to where I was after the conversion? If so, how? If not could there be double taxation liability to convert again, and on what basis?
Permalink Submitted by Alan Spross on Mon, 2012-04-16 17:27
Something is amiss here.
If you missed the 10/17/2011 recharacterization deadline for a 2010 conversion, you could no longer recharacterize at all. You could not recharacterize in December, 2011, and your conversion would be irrevocable.
What appears on your 1099R forms you received in this January for 2011?
What type of IRA does this balance appear in on your recent statements?
Permalink Submitted by John Perazella on Mon, 2012-04-16 17:47
2011 1099-R shows recharacterization on 12/31 11 for the total $65769.08 and it is indicated as SEP-IRA, per statement for end of March.
Permalink Submitted by Alan Spross on Mon, 2012-04-16 17:58
A 1099R should not show specific dates on it, just the year printed at the top. What code is in Box 7?
Are you sure this was done after 10/17? If so, what type of custodian held the Roth IRA, eg a bank?
Do you also have a Form 5498, and if so what is in Box 4?
Permalink Submitted by John Perazella on Mon, 2012-04-16 18:10
Actually it says “2011 Substitute Form 1099-R Detail”, so I guess I don’t have an official 1099R, thus no Box 7. Also have no Form 5498 as far as I can tell. It can be possible that this transaction hasn’t yet gotten through “the system”. Could that mean that when it does, and if it is disallowed, my account would just revert back to the Roth IRA status it had on Dec 31 before this transaction?
Permalink Submitted by Alan Spross on Mon, 2012-04-16 18:50
Yes, that appears to be the logical goal if this is actually what happened and not something else. Where did this substitute 1099R come from? These usually are issued to get transactions through a tax program, but in this case it might have come from the Roth custodian as a result of their regular program refusing to issue a regular 1099R due to the late date. If you are sure about this transaction occurring after 10/17/2011 when a recharacterization is not allowed, the custodian (possible clueless if they processed this) will have to reverse the “substitute 1099R transaction which will leave the funds in the Roth and you will have to report half that conversion on your 2011 and 2012 returns.
It DOES sound like this might have happened and the 65,000 figure indicates a loss during the period of time the conversion was held, and if you have statements for the SEP IRA showing this amount received back into the SEP after 10/17, it would appear that this custodian processed it in this manner. Have never heard of this happening before, but if so the only logical solution is to restore the funds to the Roth IRA to avoid the possibility of the double tax, which is obviously the worst scenario.
To reverse this, the custodian would have to transfer the funds back to the Roth IRA +/- the gain or loss that occurred since the recharacterization date. Reporting change would be to issue a revised 1099R (if initial was ever issued) and 5498 (if ever issued) showing no activity, and also not to report the transfer back to the Roth IRA of the correct amount. It is not encouraging to think what it will take to get this custodian to do this, but it is the only way to keep the IRS out of this issue.
Sounds like your accountant may have done your 2011 return correctly, not reporting any of this activity. After the last minute rush, perhaps the accountant can call the custodian and advise them to re issue that 1099R showing no transaction and transfer those funds back to the Roth with appropriate adjustments. I don’t think the custodian wants the IRS involved here, so that can be used as leverage to get them to correct this before it becomes a larger problem.
Permalink Submitted by John Perazella on Mon, 2012-04-16 19:03
I did claim all the original amounts and incurred all the taxes in my 2010 return (including the original $75041.79) which are now to be spread over 2011 and 2012, so I’m not sure I understand what you mean about reporting something else on the 2011 and 2012 returns.
Permalink Submitted by Alan Spross on Mon, 2012-04-16 20:08
I meant that your return ignored the improper recharacterization, which is correct. However, if there is a 1099R issued to you and the IRS that is improperly completed and reflects a transaction not allowed under the tax code, the custodian is going to have to void that 1099R by reissuing a corrected copy showing no recharacterization.
And more importantly, your funds need to be transferred back into your Roth IRA reflecting the taxes you are paying on the conversion. Your accountant appears to know that the recharacterization should not have occurred, but has he recommended what to do with respect to the Roth custodian or is he leaving that up to you?
I assume the Roth custodian and the SEP IRA custodian are the same?
Permalink Submitted by John Perazella on Mon, 2012-04-16 20:28
I have spoken with the custodian (same for both accounts) and they are being very helpful, but also looking for answers since this is not exactly their purview. But we seem to be on the right track and hopefully can effectuate the reversal without a lot of difficulty.
Thanks immensely for all the help thus far. If I need further guidance, should I start it as a new topic or reply to this one?
Permalink Submitted by Alan Spross on Mon, 2012-04-16 22:11
Continue with this one.