IRA brokerage wants to know

Submitted by CARROLL WILLIAMS on Wed, 2016-10-12 15:20

I want to distribute my excess regular ROTH contribution plus earnings caused by my failure to remove my RMD

when I did the the conversion this past March. Does this total distribute from the ROTH or first recharacterize and

and then distribute? Thanks



Submitted by Alan - IRA critic on Wed, 2016-10-12 17:13

Since the due date has not passed you have two choices to correct this. Neither will be expensive, but both are sort of a mess come tax reporting time:

  1. Recharacterize the entire conversion back to a different TIRA account which erases your RMD, then take your full RMD from either TIRA account, and finally convert the amount you want to convert from the original account. This use of different accounts allows you to still convert this year if you want to because the reconversion is coming from different money than your recharacterization. If your conversion is larger than your RMD and has lost money, this option is more attractive because you might want to recharacterize anyway. Your tax return 8606 will only report the total conversions you kept.
  2. Do not recharacterize. Your RMD has been satisfied (up to the conversion amount), but you have an excess regular Roth contribution to remove due to the failed conversion. Request the custodian to treat this as an excess Roth contribution and return it with allocated earnings. If you want to you can then convert an additional amount to replace the amount you had to pull from the Roth.

Submitted by CARROLL WILLIAMS on Wed, 2016-10-12 19:53

The E TRADE bacl office told me that I must figure the earnings and they will do a normal distribution of the amount I request. I know how to do that.  They say it will not be considered as an excess regular Roth distribution.  Is this just something I must report on my 1040 line 15 explaination statement or are they wrong? 

Submitted by Alan - IRA critic on Wed, 2016-10-12 20:42

IRS Reg 1.408 A-4 Q 3( b) clearly states that a failed conversion that is not recharacterized is treated as an excess regular Roth contribution. It is copied in the following post because of issues I had with the spam filter. The 1099R reporting removal as an excess contribution has a special distribution code and a normal distribution has a different code. The IRS will not accept a normal distribution whether the earnings are calculated or not as a corrective distribution. I think that the back room does not understand that a failed conversion can be handled as an excess contribution, and I assume that you do not want to recharacterize the conversion.

Submitted by Alan - IRA critic on Wed, 2016-10-12 20:47

Above Reg:

(b) If the contribution is not recharacterized in accordance with § 1.408A-5, the contribution will be treated as a regular contribution to the Roth IRA and, thus, an excess contribution subject to the excise tax under section 4973 to the extent that it exceeds the individual’s regular contribution limit. This is the result regardless of which of the three methods described in A-1(b) of this section applies to this transaction.

Submitted by David Mertz on Wed, 2016-10-12 22:25

  • I too see the two methods that Alan mentioned as being the only legitimate methods for resolving this.  Method 1 would be preferable only if you had another reason for recharacterizing (i.e., a loss in value since the Roth conversion), otherwise it comes with a negative side effect.  With a growth in value, recharacterizing and then reconverting will increase the amount of taxes you will pay on the reconversion to get all of the non-RMD money back into the Roth IRA.
  • As you can see from the Reg, the amount of RMD that was moved to the Roth IRA is considered by the IRS to be a taxable distribution from the traditional IRA (or qualified retirement plan) and a *regular* contribution to the Roth IRA.  There is no reason for the custodian to not to handle this as they would any return of contribution.

Submitted by CARROLL WILLIAMS on Wed, 2016-10-12 22:42

I called an E trade agent who had contacted me after my March Roth conversion because he wanted more of my business.  I explained my situation and told him if they could not prove me wrong,  or do this as I asked, I would have to move the ROTH to a brokerage that knew how to get this done.  I soon had a call back from someone in the tax and retirement office who quickly told me I had met my RMD with my conversion.  I politely said no I had not and I wanted it distributed as an excess Roth conversion and coded 8 on line 7 of my 1099-R.  They agreed to complete per my request, even figuring the earnings.  Did I overlook anything or make any mistakes here?       

Submitted by Alan - IRA critic on Wed, 2016-10-12 22:45

  • Custodians probably see only a fraction of these failed conversions now because the conversion income limits and marital status limits have ended. That leaves converting an RMD as one of the few reasons remaining, but because the IRS does not know transaction dates and custodians have no way of knowing whether the RMD had been completed from another account, there is a very low detection rate for this error. Low detection has resulted in custodian’s rarely running into the technically correct way to resolve this.
  • Note that the most efficient correction option would also be influenced by whether the conversion is larger than the RMD or smaller and if there is more than one TIRA account. For example, if there are multiple TIRA accounts, a conversion done from just one of them will only be an excess contribution to the extent of the RMD for that particular account (per 1.408-8, Q 4), not to the extent of the total RMD..

 

Submitted by CARROLL WILLIAMS on Wed, 2016-10-12 23:13

Thanks Alan and DMx.  I try to always go by the regs as they are discussed here.  I don’t want any IRS issues, so don”t purposefully cut any corners.  Sometimes I just make a mistake and have to dig out.  Should be all done in 2 days.  Many thanks for your help and to whoever makes this site all possible. 

Submitted by CARROLL WILLIAMS on Fri, 2016-10-14 23:44

E Trade wants to recharacterize this RMD plus earnings first and then DIST the excess from the TIRA.  They say the conversion is coded different than a conversion and thus can”t complete  my request.  Is there a problem with my doing this?  If  recharacterization should not be done, can I do a T to T move and then get this excess Cont removed, or does this make the situation worse? 

Submitted by David Mertz on Sat, 2016-10-15 00:23

  • There’s a technical problem with what E Trade is proposing.  Unless the entire conversion is recharacterized, the portion that remains in the Roth IRA is still the first amount distributed from the traditional IRA and therefore still includes the RMD.  Think of it as first in, last out.  Effectively, the last amount of the entire original conversion recharacterized is the RMD portion.  This is why Alan suggested recharacterizing the *entire* conversion before distributing the RMD from the traditional IRA, rather than suggesting recharacterizing just a portion.
  • Whatever E Trade’s problem is with distributing the excess contribution from directly from the Roth IRA, it’s a problem of their own making, a problem with their administrative procedures.  As previously said, the IRS considers the RMD portion moved to the Roth IRA to be a regular contribution to the Roth IRA and section 408(d)(4) permits any contribution to be returned before the due date of the tax return.

Submitted by CARROLL WILLIAMS on Sat, 2016-10-15 00:34

DMX, I understand and have looked at the REGS myself.  This my first time to make this mistake and it just happens to be at a brokerage that doesn”t have a clue.  I assume that returning this 2016 RMD plus earnings means that they should DIST straight from the ROTH to me by check.  Is that correct?

Submitted by David Mertz on Sat, 2016-10-15 00:56

Yes, that is most straightforward (ignoring E Trade’s administrative procedures apparently having difficulty with this); it’s the second option that Alan presented.

Submitted by CARROLL WILLIAMS on Sat, 2016-10-15 01:27

Thanks DMx  IF E Trade can”t figure this out, Is it possible to move this ROTH conversion to a different trustee and have them Dist the excess CONT?  Of course they probably would not have the record of the RMD, but I can provide that.  I am just looking for options

Submitted by Alan - IRA critic on Sat, 2016-10-15 17:56

  • It is possible, but very difficult to locate a custodian whose records do not reflect these transactions AND who both understands this rule and is willing to take on all the calculations and reporting which would have to be based on detailed information you would provide them. You may need to have substantial other assets with the new custodian for leverage to get them to agree to undertake this.
  • With respect to the E trade coding problem, they might be referring to their internal processing platform for which they might have to override the conversion status of the RMD money because it is a failed conversion. But if they are referring to 1099R and 5498 reporting, they would NOT have to change the conversion 1099R or the 5498 reporting of a conversion contribution. They would not have to issue a 5498 reporting a regular Roth contribution either, so there is no extra IRS reporting involved. That is why these are a mess – the 1099R reporting will not conform to what the tax code indicates will occur. Therefore, your tax return will probably need a very detailed explanatory statement so the IRS can understand why your return is different than the 1099R or 5498 forms.

Submitted by David Mertz on Sat, 2016-10-15 18:51

If it helps, another tax-code reference that you can provide to E Trade is CFR 1.408A-4 Q&A 6 which deals with this exact situation:  https://www.law.cornell.edu/cfr/text/26/1.408A-4

Submitted by CARROLL WILLIAMS on Thu, 2016-10-27 16:51

Finally after two weeks of insistance and many phone calls, E Trade removed my RMD, but not the earnings.  Four more days and more calls and today out came the earnings.  Could not have completed this without guidance and incouragement from Alan and DMx.  Thanks so much!

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