IRA Aplication mistake

Submitted by John L. Ostner on Tue, 2014-12-23 21:07

Client recently discovered that her directly held mutual fund ROTH IRA application with another firm in 2013 was incorrectly submitted as an IRA. After a review of her 2013 tax return we discovered that NO tax deduction was taken nor was an 8606 filed for non deductible IRA. Her question: How to move the IRA to a ROTH IRA without triggering a taxable event? The fund says that if we send it a ROTH conversion application it will code the transaction as a taxable conversion event.



Submitted by Alan - IRA critic on Tue, 2014-12-23 21:52

  • As of 10/15/2014, the TIRA contribution cannot be changed. However, the 2013 return can be amended to take the deduction if she qualifies (income not too high) or Form 8606 can be filed by itself to report a non deductible TIRA contribution. If she has no other non ROth IRAs, she can convert the TIRA tax free up to her non deductible contribution amount. Any gains would be taxable. If she qualifies for the deduction she has a choice of reducing her 2013 taxes by taking the deduction and then paying taxes if she converts now, or not taking the deduction and then converting mostly tax free.
  • That said, if the error was totally the fault of the fund company, she can pressure them to change the account to a Roth, but they will resist because it took so long to point out the error.

Submitted by John L. Ostner on Tue, 2014-12-23 22:26

It appears the fault was of the contra rep. If she files the 8606 by itself, then converts the IRA, she would be (in effect) converting a non deductible IRA to a ROTH…..paying income tax on any gains. Am I correct?

Submitted by Alan - IRA critic on Tue, 2014-12-23 23:10

Yes, that is correct – assuming this is her own non Roth IRA. There would be a 2013 8606 filed stand alone, and then a 2014 8606 with return bringing forward the basis from 2013 8606 on line 2. Could add 2014 non deductible contribution if that made sense and convert the two together. If conversion done this year, it would be reported on 2014 8606.

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