IRA converted to a Roth 20 years ago but custodian classifying it incorrectly

Submitted by Stephen O'Dowd on Wed, 2019-01-16 16:01

Looking for advice about correcting an error by Merrill Lynch. I converted an IRA to a Roth in 1998, reported on form 1040 and paid the tax over 4 years, as allowed by rules at that time.

I have all original paperwork, transaction went from Quick & reilly to Fleet to B of A to Merrill over the next decade. My account today is at Merrill, but they claim they can not go back past 2008 (the financial crisis) and they will not change this investment to a Roth, which it is. They have it recorded as an IRA.

I have appealed many times and sent documentation, to no avail.

If I liquidate or transfer to new custodian, Merrill will issue 1099 R as taxable to me in 2019 – which it shouldn’t be.

Plus, I’d want the investment to be characterized as a Roth at new custodian.

Any Suggestions?



Submitted by Alan - IRA critic on Wed, 2019-01-16 17:14

  • Getting this changed at the source will not be possible at this time barring legal costs that will exceed the benefit unless your conversion was a very large amount.  If you have good documentation, you might try taking this up with the IRS, but that would probably entail taking a full distribution and doing a 60 day rollover to a Roth IRA, then when your tax return does not match up with the Form 5498 the IRS will contact you. Of course, the risk is that of a taxable distribution plus penalty if under 59.5.
  • Chance of success through the IRS depends on what documentation you have kept. Was this initially reported as a Roth conversion on Form 5498 or was it mis reported from Day 1?  What documentation do you have that this was to be a Roth conversion other than paying taxes over 4 years and filing Form 8606?  Do you still have those tax returns? What was the conversion amount? What other activity has been made in this IRA since 1998, such as distributions or contributions? Was the conversion done so early in 1998 that Q&R may not have had their back room operations in order?  

Submitted by Stephen O'Dowd on Wed, 2019-01-16 19:32

The conversion amount in 1998 was approx. $11,000, balance today approx. $21,000. I am 62 years old.I have the original Form 1099-R 1998 reporting a Box 7 Distribution code #2, and wording Account is an IRAI do not have a separate Form 5498, although that Form # is included in the margin of my original Form 1099-RI have all 4 years of tax returns – calendar 1998 thru calendar 2001 reporting 1/4 of the conversion amount in each year, and the gross amount on line 15A in 1998 agrees exactly to the Form 1099-R.I have Form 8606 for every year, and, I have Original Form CP Notice #28 from IRS dated 12/13/99 for Tax Year 12/31/98 reminding me to report the 2nd installment of Taxaable IRA Income on my 1999 return.The notice states the following:In 1998, you decided to spread the taxable portion of your Traditional IRA that you converted to a Roth IRA over 4 tax years. You reported a quarter of this amount on your 1998 tax return. We thought it would be helpful to remind you to report the second quarter on your next tax return.They even state the amount to report, which is exactly 1/4 of original distribution.There has been zero additional activity to this IRA/Roth IRA account since the distribution in 1998, which was done in December 1998 – I believe originally opened in 1996. I have many of the annual statements between 1999 and 2018 reflecting no additions or distributions.It seems to me I have all the proof I need, and one person at Merrill I spoke to agreed with me…but it got escalated, and their final position was can’t go back past 2008 – when shtf during financial crisis.I really appreciate your input so far, and is you can add anything else with above facts, thank you very much.

Submitted by Alan - IRA critic on Wed, 2019-01-16 20:20

You obviously have documentation that you did a conversion and treated the 1099R as such and the IRS agreed at the time. Code 2 on the 1099R provides a good indication that the distributed was converted, although code 2 also applies for equal periodic payments. But how would you show that THIS TIRA account was the one that received the conversion contribution rather than another Roth IRA you may have or may have closed out?

Submitted by Stephen O'Dowd on Thu, 2019-01-17 08:30

I have my personal Statement of Financial Condition(s) (in excel format) with a supporting tab detailing Retirement assets which will reflect this account among only a few accounts, and when presented side by side for 20 years a reasonable person would conclude this was the same account I did the Roth conversion on. And, I believe I may have at least 1 annual and maybe some quarterly account statements for each of the past 20 years – starting with q&r, fleet, b of a and then merrill – reporting no transactional activity, only appreciation or decline in value, so a fairly decent audit trail can be recreated. I believe I can present conclusive supporting documentation. I’m wondering if the IRS will even bother listening/ reviewing my documentation, or is this not worth the effort.

Submitted by Alan - IRA critic on Thu, 2019-01-17 15:37

  • Depends on how much time and effort you want to put into this. As for shelling out to have an EA (enrolled agent) to represent your evidence to the IRS, you would probably sustain more in legal fees than the effort is worth. That said, if you had a consultation with an EA, you might get some advice on how to approach this with the IRS. I think the desired outcome would be a letter from the IRS to ML authorizing them to simply re title this IRA as a Roth IRA and not issue a 1099R. 
  • It would be helpful if you could locate any 1998 statements showing the date of distribution from a TIRA account and another statement for the refererenced account intended to be a Roth IRA showing the date and amount of your contribution within 60 days. The code 2 1099R indicates that the “conversion” was done by a same trustee transfer rather than a 60 day rollover. An actual distribution to you would have had a 1099R code 1.  If such a transfer was done from TIRA to TIRA there would be no 1099R issued and no 5498 since these are non reportable. Therefore, the 1099R that you have is indicative of a conversion transfer, but the back room at Q&R apparently opened a TIRA in error and then treated the transfer as a TIRA to TIRA transfer which would not be reported on a 5498 at all. Likely, a 5498 was never issued, and if it was would probably not show a Roth conversion anyway.
  • With the total chaos within BofA and ML during the financial meltdown in late 2008, it is very likely that these old records were actually lost or destroyed, rather than this being an excuse to avoid a records search. But you could also approach ML again and see if it is possible to access ONLY the 1998 Q&R records for your account if you were willing to pay a reasonable amount for that search, but put a cap on the amount you would pay because they could well not locate anything.
  • There were obvious issues implementing Roth IRAs in 1998. One such issue that could have led to this is that if an IRA account record does not clearly show “Roth IRA” it cannot be a Roth IRA. “IRA” alone always indicates a traditional IRA. Might be that Q&R and also you did not realize this, and that might be why you did not detect this error right away?

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