Roth mid-air conversion

Submitted by Douglas Bauerband on Thu, 2019-11-07 17:01

Our client has an IRA with Jackson national and every year he has approx. 5k converted to his Roth IRA with E-Trade. He is 60 yrs old.

we wanted to make sure that E-Trade knows to code this as a roth conversion and not a contributions.

This was their answer below…does this make sense? Our client does not want to open another IRA account.

Having the funds go direct from an IRA at an outside custodian to a Roth IRA at E*Trade is considered a mid-air conversion, which E*Trade does not do. Because E*Trade does not do mid-air conversions, they cannot code the deposit as a Roth conversion. The only option to have it coded as a Roth conversion is to open an IRA at E*Trade so that it is like-to-like, and then submit a Roth conversion request to have it converted to the Roth so that it is coded as a Roth conversion.

Thank you.
Douglas



Submitted by Alan - IRA critic on Fri, 2019-11-08 00:36

  • I really do not know what the definition of a “mid air conversion” is. It is not an IRS term and does not appear anywhere in the tax code. Someone (possibly Vanguard) coined this term a couple years ago but there is no clear definition what this is. Regretably, E Trade is now also using the term to describe a certain method of converting.
  • Pub 590 A describes 3 ways to convert. 1) Distribution and 60 day rollover  2) Trustee to trustee transfer and 3) Same trustee transfer. Perhaps E trade will not accept method 2, and maybe not even method 1. 
  • How was the distribution from Jackson done? Who was the check made out to and where was it sent?
  • I would guess that these issues are related to mismatches between Form 1099R issued by the distributing custodian and Form 5498 issued by the receiving custodian, but I would rather not guess.


Submitted by Douglas Bauerband on Sat, 2019-11-09 01:00

How was the distribution from Jackson done? Who was the check made out to and where was it sent?The check was made payable to: TCA by E*Trade (our clients Roth IRA) and send directly to them from Jackson National (our clients IRA).  TCA received but insists on coding it a ROth contribution instead of a conversion.



Submitted by Alan - IRA critic on Sat, 2019-11-09 04:20

E trade apparently will not convert to a Roth unless THEY have the TIRA account, so they are requiring opening both a TIRA that receives a direct transfer and a Roth IRA into which they will then do a same trustee transfer. My guess is that they have been involved with too many mismatches between another firm’s 1099R (or lack of) and their 5498 reporting a Roth conversion to the IRS. What they want is a non reportable TIRA transfer between firms so they can control both the 1099R and the 5498 reports. I don’t think many custodians are doing this, but it could be a trend. The involvement of this TCA intermediary probably does not help either.  If client does this every year, is this the first time client has run into this problem?



Submitted by Douglas Bauerband on Thu, 2019-11-14 15:38

We have done this the past 5 plus years and now they want this so called phantom IRA opened.  Which we don’t want to open.  No reason to.  They will not change the coding on the account to a roth conversion but keeping it as a roth contribution even though the client is a retiree (under the age of 70).Can we just do something with his CPA every year so that they know it is not a contribution?



Submitted by Alan - IRA critic on Thu, 2019-11-14 17:17

  • E trade has apparently changed their procedures from past years. If client had earned income (or spouse does), a regular Roth contribution  would be just as effective as a conversion if he did not already make an IRA contribution for the year, and there is no penalty on the IRA distribution since he is over 59.5.  However, if there is no earned income to support a regular Roth contribution or his MAG is too high for a regular Roth contribution, then if E Trade reports a regular Roth contribution on Form 5498, the IRS will consider this an excess contribution. 
  • Jackson’s 1099 R will show code 7 this year (normal distribution). Therefore, if the CPA reports a conversion on Form 8606, there will be a mismatch if E trade reports a regular contribution instead. 
  • Therefore, if client is retired with no earned income, this cannot be reported as a regular contribution. Choices are to open the E trade IRA or open a Roth IRA with a different custodian who will accept a conversion contribution and perhaps transfer the E trade Roth to the new custodian at some point. This would result in only one open Roth account, and no extra TIRA account.


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