My 94 year old client wanted to move $100k from his traditional IRA at ML to his traditional IRA at MS. He spoke with ML and they understood what he wanted to do, but when he submitted the paperwork, he indicated, in error, “regular distribution” instead of “transfer/rollover”. The funds moved trustee to trustee. The 1099-R issued by ML shows $100k in both box 1 and 2a (as taxable distribution), the “Taxable Amount Not Determined” box is checked and the distribution code is 7. The 5498 issued by MS shows the $100k in box 2 “Rollover Contributions”.

Even though it was not the client’s original intention, it would benefit the client to take the $100k into income for 2021 due to really high medical expenses, but he never took the $$s out of the IRA. Is it possible to just take the $100k into income and create $100k of basis even though the funds still sit in the traditional IRA?

Since the 2021 return is on extension, we have asked MS to move the $100k that they received into a ROTH but they have balked at this stating that we need to provide documentation that the correction can be made retroactive to 2021 since the return is on extension. We definitely don’t want a 1099-R for 2022 indicating a $100k ROTH conversion. Do I understand correctly that this can be done?

Thanks for your help. This is a sticky one!