Roth IRA BDA Transferred to Traditional IRA BDA | Ed Slott and Company, LLC

Roth IRA BDA Transferred to Traditional IRA BDA

I have a client who inherited several accounts from his father who recently passed away. One of the accounts was a traditional IRA BDA established at death from one of fund companies where his father had a traditional IRA already established. We moved this account to our firm and everything went just fine. His father also had two Roth IRA BDA accounts as well and the first one transferred over to my client's custodian with our firm with no problem either. The second Roth IRA BDA account by mistake transferred into my client's traditional IRA BDA account. Simply an error in processing and neither the B/D or custodian caught the registration mismatch. A month or so went by and we noticed what happened. Meanwhile there was some market movement on the account and I was told by our operations team in the B/D home office that in order to correct this, I will need to submit a letter of indemnity due to the error. In the letter of indemnity I would need to instruct our trading dept. to cancel the sells placed on the original positions that were transferred in then sold and that buys will need to be cancelled as well in order to make enough cash to buy back into the funds that were sold. I would be responsible for market movement. In this case ~3k. Seems to be the IRS would allow some kind of letter of explanation and allow the dollar amount that transferred into the traditional IRA BDA to be transferred back out and into the correct Inherited Roth IRA BDA without concern for having the actual funds that were originally transferred in and later sold have to go back to their original status then transfer out.

I am not aware of any IRS guidance on procedures to correct such an error. The indicated transactions are probably necessary from a processing standpoint to unwind everything back to the date of the error, otherwise it would make no sense. Market changes are bound to be somewhat different after these reversals than simply transferring an earnings adjusted amount to the inherited Roth. These procedures could operate in the client's favor or could produce losses. The most important thing is that an equitable amount be placed in the Roth to avoid future double taxation. There may have to be amended 5498 forms issued for 12/31/2011 unless all this took place in 2012. Otherwise, the IRS would not be involved as a result of the corrective procedures. Hopefully, no RMD or other distributions have been taken in the interim.

Maybe they are missing a step? If the buys and sells and cancelled and rebilled, there should not be any net gains or losses for the Roth IRA. Typically, all other activity is also be moved for this type of correction- which would help to ensure that neither account gains from it.

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