IRA Contribution Error Correction
In April of 2024, a client sent in a 2023 non-deductible Traditional IRA contribution. I just noticed that it was deposited into the ROTH IRA instead. The client reported the contribution correctly on his taxes. The funds are with Pershing, and they seem to be willing to make the correction, however I don’t know if it is in the client’s long term best interest.
I am concerned about future IRS issues if we make this correction. From my understanding, if it were a client error, we would remove the contribution, and he would have to amend his 2023 return showing the correction. If he wanted the money in the proper IRA he would then have to deposit it for a 2024 or 2025 contribution. Since it is an advisor error, is it OK to be recorded as a 2023 contribution?
Permalink Submitted by Alan - IRA critic on Tue, 2025-03-25 11:17
It depends on what Pershing will do, but I doubt that they will issue a corrected 2023 5498 reporting the contribution as an IRA (not Roth) contribution due to advisor error. If this was a custodian error, they may be more likely to correct the 5498, but many custodians will not do so if the error was not reported to them much sooner after being made.
You are correct, that in most cases like this there is a Roth contribution that is also an excess contribution subject to excise tax that would have to be corrected after the due date. If not excess, there is no need to remove it, just amend 2023 1040 to delete the 8606. If eligible, a direct Roth contribution is always better than a ND IRA contribution.
I suggest that some details as to what Pershing will do should be determined. The 2023 5498 should also be checked to make sure that the contribution was reported for the correct year (2023).
Permalink Submitted by Lisa Krall on Tue, 2025-03-25 15:16
Thank you for the help Alan! I didn’t even think about the 5498. We called Pershing and confirmed that a new tax form will be created. Pershing stated that once we make the asset movement correction, the system will create a new tax form for the correction.
With the form being corrected for the IRS, I feel it would be OK to proceed with the correction. Is there anything more you think I should be looking for?
Permalink Submitted by Alan - IRA critic on Tue, 2025-03-25 15:54
They should calculate the gain or loss on this contribution for the time this contribution has been in the Roth IRA, and transfer this balance to the TIRA. Such a transfer should not be reported on a 1099R. In this case, the corrected 5498 for 2023 would just report the contribution as if it was originally made correctly to the TIRA.
Or they might choose to back date a recharacterization to 2024 when it would have been allowed. That would generate a 1099R for the Roth IRA reporting a recharacterized Roth contribution and a 5498 for the TIRA reporting a recharacterized contribution deposit. The 5498 in this case is different than the one in the above scenario, which does not involve a backdated recharacterization.