Roth transferred in error to a Tira, need help

Submitted by john wilson on Thu, 2018-03-15 00:11

Three years ago at age 62, I did a trustee-trustee transfer of my 15 year old Roth. I just see now it was an error for it to be registered after transfer as TIRA.I read other postings here about similar issues, but not sure what to do, as my situation differs from other postings.
The simplest ideaIi read was to see if the custodians will change it to a Roth with a corrected 5498 for all years involved. Can that be done 3 years out? Is there a way Custodians can communicate with IRS to fix it? I was told it was a TRIA when I signed, so I may have some fault waiting 3 years.
When it left the custodian where it was a Roth, it transferred as a TIRA to one bank for 18 months, and then transferred as a tira to a second bank where it is now. Could they both issue corrected 5498s as a Roth and just change how it is registered. What if a self certify (not sure when that applies)? Or were thos suggestions olny if caught right away? All the 5498s only had entries in box 7 as an ira, and box 5 showing fair market value. There were no new contributions for those years. So it was all post tax money. There is question of COULD custdians do it, and IF they would.If so, is that all I would need to communicate with the IRS, and hope the corrected 5498 would just over-ride the previous ones? When is IRS likely to notice excess contributions?
The worst scenario I read is that it is a transaction not allowed, and no method to reverse, so wouls be treated as a Roth distribution, and as excess contributions to an TIRA. On that point form 8606 ( to report non-deductable ira) or form 5329 (to pay 6% penalty on excess) might be involved. Does the fact it is a T_T transfer, not a contribution or rollover, effect the 6% penalty issue? Does a waiver of the 60 day rollover rule help me?I would like to do it in a manner not needing to amend past returns.Is it correct that form 8606 or 5329 can be submitted alone without attach to 1040 or 1040X? In any case this scenario could cost me lots of money, and loss of Roth status.
Am immediate concern is that I need the 6% penalties to stop adding up ASAP. But do not know what to do about the funds if I r move them. If there is any chance to have them changed to a Roth, I assume the funds still need to be in there? But if I do withdraw them, what do I need to do to have them considered tax exempt post tax money?
I read a couple example where custodian was at fault, the custodian was able to get everything fixed with no consequence or actions with the IRS on part of the IRA owner. Otherwise I have tried to research these issues, but I am totally confused on what applies to me, and how to start fixing this. It is not enough money to pay for a Letter Ruling. Yet I want to be proactive and start. Any help is greatly appreciated.
THANK YOU!



Submitted by Alan - IRA critic on Thu, 2018-03-15 01:21

Sorry about the negativity, but this is about the worst error to have corrected, even if you notice it immediately and there has been no change of custodians. Even in those circumstances, many custodians will not be cooperative, partly because they don’t know how to fix this. You are correct that technically, you have a 3 year old Roth distribution not eligible for rollover or transfer to a TIRA and therefore an excess TIRA contribution except to the extent that you were eligible for a TIRA contribution that year and did not make an IRA contribution for that year. No custodian is going to communicate to the IRS except in extremely rare circumstances such as if they feel that they have unlimited liability for an error. If you have talked to Bank 1 about this, you probably have an idea of what you are up against. What is the amount that was initially transferred to the TIRA?



Submitted by john wilson on Thu, 2018-03-15 17:08

About $20,000 transfered. When is the next date that the 6% penalty kicks in again for another year. I ask because it seems important to get it out so no more penalties, but how to do it. would it be a distribution? How would I do it to be tax free? AS I said not know where to start. You are right about the bank not knowing what to do.



Submitted by Alan - IRA critic on Thu, 2018-03-15 17:47

  • If you correct it, that pretty much means that you do not want to pursue the reformation, which is an extreme long shot. For 20,000 it is not worth retaining any expensive tax attorney to file a demand with the original bank in the event you have the documentation for such a case.
  • Let’s see what you do have with respect to the original transfer. How was this done? Did you complete a form, and if so which bank’s form was it? Do you have a copy of it? Was it the second bank that ordered the transfer from the first bank? Was a direct transfer done or a 60 day rollover? With the first there would be no 1099R or 5498 issued. A direct transfer check made out to the second bank FBO you could have been sent to you for delivery. If so, do you have a copy of that check?  What I am looking for is enough documentation that points to one of these banks messing up without you having contributed to it? Without such documentation, pursuing this now is a waste of time and money. It would have been tough enough even if you got on this right after it happened. In addition, if both banks contributed to the error, they will use that to stonewall, and banks have legal depts to fight such claims. So ideally, only one bank made the error and none of it was your fault. FYI – an IRA is deemed to be a traditional IRA unless it indicates Roth in the title. 


Submitted by john wilson on Fri, 2018-03-16 20:51

First let me thank you for the help on this.As for your questions, at least I have copies of all the documents discussed. Both transfers were both Trustee to Trustee transfers. I was sent checks, both made out to the receiving bank FBO my name. Neither check mentioned IRA or Roth.  Each transfer was initiated on the receiving banks’s forms titled as being IRA. I signed them both.  So many of the sending banks documents  lead me to believe it was a Tira, that confused bank employees as well.  When transfered, my statement called it just an IRA CD that was being transferred, and also said my “Roth Savings” balance was $0.  So I thought it was not a Roth.  Though the 5498 said it was a Roth, I did not know or see that at the time.  Besides missing it for 3 years as well, did I contribute to the mistake?  What if the bank thinks I did?Does the IRS have a requirement that I did not contribute to the error,  for a bank reformation to be allowed?  Or is it just a concern that the bank will see it as an excuse to not do it?  How much work or cost for the banks to do a reformation that they wold resist it.  I guess it would take all 3 banks to work on it?  and maybe still involve IRS talks?  Does it still sound like an extreme long shot to even ask?  I have not talked to anyone yet at the banks.So if not happen, then I do not know where to start to correct it.  I assume first is to get the money out to stop another year 6% penalty.  Is that going to be my 2017 filing deadline to avoid that?  But how do I do that, and could it be tax exempt?  How would bank report it?  How are forms 8606 and 5329 involved.  Can I avoid amending 1940s?  I feel paralized to take any action.  I think I understand the moving parts, but not my choices or how to move the parts, so to speak. I would like to take care of this before the IRS asks me about it first, or doesn’t that really matter?



Submitted by Alan - IRA critic on Sat, 2018-03-17 00:54

  • A new 6% excise tax is incurred if the excess is still in the IRA at year end. Therefore, you have the rest of the year before a 2018 excise tax will be incurred. That is normally plenty of time to determine how best to deal with an excess contribution, but in your case it may take at least that long to get the needed response from these banks. The challenge is that you may have to convince all 3 in chronological order to have the IRA re titled as a Roth. If Box 7 on the 5498 forms all check “IRA”, then the error started with the first bank and carried through. However, the third bank will likely refuse to change their IRA to a Roth without having the prior banks changing them, since that is a convenient way for them to stonewall and not have to determine what forms they would have to file to make the change. 
  • You indicated that you have one 5498 for a Roth IRA. Was this from the first bank and what date did it apply to? Do you have any other Roth IRAs with any other of these banks that could have confused the issue, or was this the only one?  Assuming it was never treated as a Roth after the first bank, did the CD amounts you purchased change for any other reason than interest? In other words, did you ever make any new contributions or other transfers, take any distributions (1099R),  or was the same amount plus interest just moved from bank 1 through 3 all by direct transfer meaning no 1099R or 5498 ?  If so, the one 5498 that did show a Roth only stated the year end FMV and not a new contribution, right?
  • I don’t think there is any IRS template to resolve this type of situation. Banks may have some IRS guidance on what authority they have to make changes, but I have no idea how far this goes. The IRS will want  you to resolve this directly with the banks, and the banks will stonewall and blame each other or you unless the evidence of complete negligence falls on one of them. That bank is the only one that you will have any leverage with. Bank 3 is the only one that you MUST convince to change their IRA, so to save time you might get all documention in chronological order, ask for a conference with a senior staffer and ask what additional documentation is needed to enable them to change their IRA to a Roth. You might get a clear enough answer to know whether to continue on with this or abandon the effort and just withdraw the excess contribution. That would save you the trouble of dealing with two banks that are no longer critical and you are no longer a client of.
  • Regarding these transactions – you probably first opened an IRA with bank 2 that was not a Roth IRA. Then they would have given you a form that should have had a box to ID the type of IRA it was. I don’t think you have a copy of that form?
  • Just guessing, but it sounds like the critical point at which this Roth was moved into a TIRA occurred when you opened an account at bank 2 which was not a Roth, then signed a form that did not show the IRA as a Roth. That said, bank 1 should have made the check payee “FBO (you) Roth IRA”. Instead it just showed your name. That would mean that everyone had a hand in this error occurring.
  • I guess this situation makes a case for using brokered CDs in an IRA brokerage account. It keeps the money out of the hands of poorly trained bank staff that are not qualified to spot potential errors before they occur. And the CDs are all under the same IRA account number that never changes. There are no 5498 forms issued except for the total brokerage account value. It’s too bad this happened because you did the right thing by avoiding 60 days rollovers and it is sometimes a hassle to get banks to participate in direct transfers. You will probably have to give up on reforming the IRA type, but can certainly took to one or more banks to see if they have any ideas but by October if you are not getting anywhere I would plan to withdraw the excess contribution which was the amount contributed to the first TIRA at bank 2. Perhaps a CD matures before year end. 


Submitted by john wilson on Tue, 2018-03-20 00:49

Continued thanks for the help.in case this is relevant background, I also had a Tira CD seperate from the Roth CD that I moved through the 3 banks in the same year. But it was kept separate. Yes, I have copy of 2nd banks transfer showing it is a Tira.>The first banks 5498 listed Roth for 2014 showing only ending FMV. (2nd bank had 5498 for 2015 and 2016 showing end FMV total of all Tira holdings, which included amounts in adition to what was transferred)>What started as the Roth CD transferred from bank 1 through bank 3 as the same amount plus interest only, no other transaction. But that changed once it got to 3rd bank, where it was deposited and co-mingled in a Tira Money Market Savings account that already had funds (the Tira CD moved from bank 2) already deposited in it. All within the same bank, the MM account then had a transfer to a higher interest MM type account, as well as funds transfer into CDs.Throughout all this the MM account balanca kept a total well above the amount of the original Roth CD.>You warned me about complicated calculations; does what happend at bank 3 make it impossible or harder? That covers the messy details of the error that I will ask the custodians to help chage to a Roth.>Since not sure it will happen, I spent spme time thinking about of to withdraw the excess funds. Looks like I also have to withdraw the earnnings on the excess? But I read “earnnings on excess contributions are determined for the period during which the excess amount remained in the IRA, taking into account the performance of all the assets in the ira”.Does that mean all the various cds or Money Market savings accounts I have at that institution or custodian, or just the account originally deposited in? I suspect there is something complicated here I am not aware of, and that you will know. >Since a 1099-R is required showing amount withdrawn in box !, earnnings in box 2a, and a code in box 7 showing if it is taxable or not, does that mean the bank would do all that complicated calculation since they submit or prepare the 1099-R?AS for box 2a on the 1099R, what determines if tax exempt? should it be exempt since source of funds was a Roth>This quote concerns me “If you fail to remove the correct amount when correcting the excess. the IRS could determine that the correction did not occur ans assess penalties.”.  Could that mean the yearly 6% excise tax would continue while one thought it was stopped, because one thought the excesswas correctly withdrawn? Could one take out just a little too much just to be safe?> sincewe think it may come to this, I need some direction on reporting the roth withdrwal, and removing the excess contributions to the Tira, and paying the 6% excise tax.> What years would I need forms 5329 and 8606 for?  What, if any,years need a 1040x? And a confusing issue, in none of the years involved, did I make any IRA contributions. It sounds like there is some way to reduce the excess contributions that the6% excise tax is due on,by the contributions I could have taken, but did not, in years 2014-17 (will I owe it for 2017 too?) I do not kmow where to do that.> Each year I filed i used 6 month to file extension in October. but no contributiond.Where should I tell IRS about the transferr error, or should’nt I?. Any othre issues I not thinking about?.Thank you.



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