Weird situation with conversion to Roth IRA. Any suggestions?

[FEDUKE404]

In early 2010, client transferred previous 401(k) plans from prior employers to new traditional IRA account. Forms 1099-R have been issued, code "G."

Shortly thereafter, client opened a new Roth IRA account, managed by the same investment firm. Intent was to have monthly payments, via payroll deduction, made to the Roth IRA account.

Later in the year, client also decided it was prudent to convert the traditional IRA account (funds originally from 401k account) to a Roth IRA, using a separate Roth IRA account, and plans to pay the taxes for doing so in 2011 and 2012.

The "new money" Roth IRA account continues, using monthly payroll deductions.

HERE IS THE PROBLEM:

Somehow or other the first two months of payroll deductions were made into the traditional IRA account, and not into the Roth IRA account. (All of the later payments were properly made to the Roth IRA account.)

Client now has (apparently) made an unallowable contribution (too much money/retirement plan/etc) to this traditional IRA account. The account was closed in late 2010, since all funds had previously been moved to the Roth IRA account.

Question #1: Was an actual (unallowable) payment to a traditional IRA account made during 2010? Did he, or didn't he, also have an "excess contributions" payment to the traditional IRA which would need to show up on Form 8606?

Question #2: How does this get reconciled with the existing Form 1099-R, code "2", for the transfer into the Roth IRA account?

In theory, the "excess" contributions likely earned something and, if somehow removed, would lessen the dollar amount of the funds transferred from the traditional IRA account to the Roth IRA account.

FWIW: A "large" national firm is in charge of the IRA accounts.

Is this a "tax" problem - or can the folks who essentially created this mess administratively repair things and just issue some new documentation??

Thanks for all help. I've just never encountered a situation quite like this before......

FE

[JG EA]

You have until Apr 18 to withdraw excess contributions and not pay the 6%. You also withdraw the interest. And I believe you pay tax on the interest it made for the year. I was reading about it in pub 590.

[FEDUKE404]

Devil is sadly in the details

You have until Apr 18 to withdraw excess contributions and not pay the 6%. You also withdraw the interest. And I believe you pay tax on the interest it made for the year. I was reading about it in pub 590.

But of course - that is the standard procedure and I've had several people who, in the past, needed to use that option.

This case differs because the account is already closed (withdraw what??) and the ill-gotten proceeds from the excess contributions (calibrated how?) from that account also now rest in the Roth IRA account along with the formerly traditional IRA formerly 401(k) funds.

FE

[Lion]

Recharacterization

Recharacterization. This is between the tax payer and his broker and not his tax preparer.