Erroneous Roth IRA recharacterization

Submitted by Seth Meisler on Tue, 2015-11-03 14:27

Individual has 3 Roth IRAs. One Roth received a conversion from an IRA in 2014. The other 2 Roths did not and had values from prior conversions. In June of 2015, ALL 3 Roth IRAs were accidently recharacterized to an IRA for tax year 2014. However, only 1 of the 3 Roth IRAs was actually able to recharacterize. Thus 2 Roth IRAs were accidently closed and the assets moved to an IRA. It is now November and the error was caught (4 months later) and we’re trying to correct. The IRA administrator is not allowing the erroneous Roth recharacterization to be corrected because it is past October 15th and the recharacterization documentation stated that this was for tax year 2014. Note: So far there is no 5498 or 1099 to reflect the recharacterizations since it took place in June 2015. Their suggestions by the administrator are:
1. A private letter ruling
2. Filling out a form requesting removal of excess contribution to an IRA, (but I would imagine this would not let the value go back into the Roth IRA).
3. Filling out a form for a new 2015 Roth conversion.
Of the 3 choices, it appears that only #3 is viable. Any other suggestions? Does the position of the administrator make sense? For the 2015 tax return would you simply include a letter of explanation?



Submitted by Alan - IRA critic on Tue, 2015-11-03 16:06

  • No regular Roth contributions were mentioned, so I assume these Roths just held conversions and since only one account held a 2014 conversion, that is the only one that could have been recharacterized, and was. It was too late to recharacterize any of the pre 2014 conversions in the other accounts which I assume the IRA custodian communicated. Why then were distributions taken from the other two Roths?  Technically, there is a reportable distribution rather than a recharacterization on these other 2 accounts (perhaps no tax but a 10% penalty on conversions held under 5 years unless individual is 59.5). The rollovers to a TIRA were not permitted, so an excess TIRA contribution was created that needs to be corrected. The situation is highly abnormal and the TIRA custodian will need to be convinced why a corrective distribution is necessary, not a normal distribution. This will prevent double taxation, as only the earnings on these excess contributions will be taxable. Then, if the amounts are worth the delay and expense, a PLR can be requested to extend the 60 days to allow time to roll the larger distribution back to a Roth IRA. The smaller one cannot be rolled back because there is only ONE rollover allowed in a 12 month period under the new rules.
  • I expect that the permitted recharacterization will be reported normally on the 1099R/5498. The other two Roth accounts will generate a 1099R for the distributions, but the TIRA will generate a 5498 for a rollover which will be incorrect, but also a 1099R for the excess contribution corrections. The individual will probably have to include an explanatory statement on the tax return regarding the disallowed rollovers and the resulting corrective distributions.  Does this make sense?.


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