Hello! We started a thread but did not receive a response although you had requested a follow up. I am making a new thread here and wanted to see if you had additional thoughts. Copy pasting the prior thread.

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Hello, we would really use your help regarding some Roth IRA help. My wife has had her accounts managed by a Morgan Stanley team who we think did not handle her IRA’s correct. Could you please advise what the best course of action is?

In 2023, she made $5,000 contribution to Roth IRA not recognizing that both her income and MFS tax filing status made her ineligible. She worked with Morgan Stanley on recharacterizing this to non-deductible Traditional IRA contributions the same year of 2023. But the Roth conversion (or what we thought it was, see below) was done in February of 2024.

In 2023, she subsequently made an additional $1,000 traditional IRA contribution.
– In January 2024, she made $500 non-deductible traditional IRA contribution (for 2024 traditional IRA)
– In February 2024, she converted these $5,000 + $1,000 + $500 to Backdoor Roth IRA and accounted for this when she filed 2023 taxes.
– In 2024, she made an additional $6,500 to traditional IRA to Fidelity (we left her prior Morgan Stanley team and took care if this ourselves with Fidelity moving forwards) and converted this $6,500 to Backdoor Roth IRA.

The issue comes up when I looked at her 1099-R form box 7 codes:

– 2023 Roth IRA 1099-R: N (recharacterize Roth to traditional). This makes sense to me.
– 2024 Morgan Stanley Traditional IRA 1099-R: R (converting traditional to Roth). I believe this incorrect and should have been a code of “2”
– 2024 Fidelity Traditional IRA 1099-R: 2 (converting traditional to Roth). This is correct and reflects the part we just did ourselves.

It turns out that Morgan Stanley actually processed the Backdoor step as Traditional -> Roth recharacterizations instead of conversion.

Questions:

What issues and implications does this present for us? Specifically, does this change a) our tax liability and b) her eligibility for Backdoor Roth IRA’s in the future? What is “wrong” about having done this as a recharacterization instead of a conversion? (We already did her 2025 Backdoor Roth IRA steps all very easily in Fidelity for this year. Her traditional IRA accounts are currently empty.)
Is this Traditional->Roth recharacterization fixable to what should have been done for a Backdoor Roth Conversion?
Is there anything else we need to know about this situation?
This is really complicated (at least from our perspective)…we have done a lot of reading and think we understand things up until now. But we really appreciate your help with this!

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Alan – IRA critic on Wed, 2025-04-02 22:14

You appear to be correct about the error. There will probably be a 5498 issued in May for the MS Roth showing the deposit of a recharacterized contribution from the TIRA.

If you still have them, check any MS IRA statements for the month in 2024 in which this transaction was done. That would indicate whether they just made a 1099R error or whether the intended conversion was done as a recharacterization.

Note that because the 2023 Roth contribution was already recharacterized to TIRA, that contribution was NOT eligible to be re-recharacterized back and the MS system should have blocked any recharacterization of the 5000 that had already been recharacterized. However, the other 1500 was eligible for recharacterization because it was made as a TIRA contribution originally. Please advise the amount in Box 1 of the R coded 1099R (~1500 or ~6500).

There is nothing that MS can do now other than to issue a 1099R indicating a conversion (Code 2) and another corrected 1099R changing the R coded 1099R to 0 in the applicable boxes. Even if they still had the account (or do they?), this would be a battle, but since they do not the chance that they would correct that is about nil.

Of course, this will leave her with an excess Roth IRA contribution for 2023 which would trigger a 2023 6% excise tax and also for 2024. To correct that, a Roth IRA distribution in the amount of 6500 would have to be withdrawn from the Fidelity IRA. That distribution would be tax free since it comes from regular Roth contribution but would need to be reported on a 2025 8606.

Have you filed the 2024 return yet?

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Andrew on Thu, 2025-04-03 11:39

The 2024 MS 1099R with code R is $6613.65. The 2023 MS 1099R is $5213.47. The accounts are still available on her MS portal. I was able to look back and the statements do indeed show they were done as recharacterizations and the numbers match up.

We have not filed the 2024 return yet.

So to summarize: If they have the accounts, they may be able to issue corrected forms. But we would still need to withdraw $6,500 from the Fidelity Roth IRA? Or would that only be if they are not able to issue corrected forms? We are not exactly sure what the next steps are.

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Alan – IRA critic on Thu, 2025-04-03 12:09

If they still hold the accounts, they are more likely to at least listen to your point that they have executed a disallowed transaction by recharacterizing a second time the 5000 contribution. The other factor is the nature of the miscommunication that led to a recharacterization being processed instead of a conversion. Whose fault was it? For example, if you made the request on a recorded line and the request was for a conversion that they botched, they should correct the 1099R forms and 5498 forms (2024 5498 yet to be issued). Then there would also be no excess Roth contribution and no funds would have to be moved. Therefore, the first step is to present this issue to MS as clearly as possible, preferably to a highly trained specialist (not the typical CSR), and follow it up in writing. You may wish to make the point that because a re-recharacterization is not allowed, you will have to ask the IRS for guidance and they probably do not want the IRS to look into this. After you get their response, the next steps can be determined. File an extension for your 2024 return, which also requires that you pay what you expect to owe by 4/15. Once they have your request, due to the complex nature of this hybrid error, expect at least 3 weeks to pass before they provide an answer.

Of course, even if they agreed to correct only the disallowed portion (transfer it back to the TIRA), there would still be an excess Roth contribution for the allowed portion (1500) due to income.

Please post back here when you find out what they will do, if anything.

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Andrew on Thu, 2025-04-03 12:47

Ok, thank you. We have reached out to them and made our case. We specifically ask for the Backdoor Roth IRA which we thought implied a conversion seeing as how a recharacterization is totally different from a conversion. There were some residual gains that we later specifically as for the Backdoor Roth IRA conversion but that was also done as a recharacterization; I would have hoped that they would pick up on the discrepancy at that point too.

This is very helpful and we’ll go ahead with the tax filing extensions for now. We will keep you posted.

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Andrew on Thu, 2025-04-10 15:27

I heard back and they informed us that they are not able to revise the forms. I am awaiting a written summary but they are invoking that since we have signed documentation for their actions, they say they are not liable.

In this situation, how do you recommend we best address each of these amounts, whether any withdrawals are needed, and whether we need to correct any prior tax returns? Not sure if some of these are an issue, but I wanted to lay them all out there for completeness.

We have made our expected tax payments and thus filed for tax filing extension in the meantime.

• The $5,000 that was contributed to Roth in 2023, recharacterized to traditional in 2023, and (inappropriately) recharacterized to Roth in 2024.
• The $1,000 that was contributed to traditional in 2023 and (inappropriately) recharacterized to Roth in 2024.
• The $500 that was contributed to traditional in 2024 and (inappropriately) recharacterized to Roth in 2024.
• The $6,500 that was contributed to traditional (via Fidelity) and properly converted to Roth all in 2024.
• The $7,000 that was contributed to traditional (via Fidelity) and properly converted to Roth all in 2025.