Roth IRA conversion mess

[veritas]

In late 2006 I suggested my client convert x dollars from traditional to a Roth since the income was so low that year.

Advisor (not me) had a distribution from traditional IRA in 2006 for x dollars which we included in income. The first week of 2007 all money went into a ROTH IRA. They had no existing IRA with this fund family. The fund family later in the years says oops it has to go to a traditional IRA first.

So now I have a 1099R for 2007 for a distribution from a traditional for x dollars that ended up again in a Roth.

First mistake is the money did not go into a traditional IRA.
Second mistake is the transactions should have all occured in 2006.

I don't think I have a way to salvage this?

[Koss]

Failed Conversion/Rollover

There is a process described in one of the IRS pubs, in which you can qualify for an automatic waiver of the 60-day time limit for a rollover from one plan to another, if you meet certain criteria.

One of the core concepts is that you must be asserting that the delay in completing the rollover was caused by clerical errors made by the financial institution.

If your client doesn't meet the criteria for an automatic waiver of the time limit, then they can apply for a non-automatic waiver. But that involves a stiff user fee of $1500 or something. (Which can actually start to look like peanuts if you are dealing with a failed rollover of a 401(k), in the amount of $400,000, for someone under 59 1/2.)

If there is some reasonable evidence, i.e., a paper or electronic trail, that demonstrates that the client intended to put the money into a Traditional IRA, for the purpose of performing a rollover, then he may have a pretty good case for the automatic waiver.

I don't know how you document the fact that one meets the criteria for an automatic waiver. I'm sure it's in the publication.

The first step, for heaven's sake, is to get the institution to recharacterize the existing Roth IRA as a Traditional IRA, and recharacterize the 2007 contribution as a rollover contribution. Your client has until April 15 to give instructions to the institution concerning any contribution that was made during 2007.

[veritas]

Recharacterize

this was my first thought.

However there was no traditional IRA with this fund family until 7-07, when the fund family discovered the error.

The money was distributed from the first traditional IRA in 12-06 from a brokerage account. My thinking is we have a problem since this is well over 60 days from distribution until received to a traditional IRA in the new fund family. I will wait a day or two and see what the advisor comes up with.


In a nutshell the advsior did not follow the proper steps and also the fund family screwed up.

I am definitely putting this client on extension. The error if not corrected will cost my client around $10,000 that he would never have paid had things been done correctly.


Thanks Burton for your input.