Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

July 12, 2013
How can I fix an IRA custodian's error on a trustee-to-trustee transfer?

Q: I switched custodian for my Traditional and Roth IRA back in March 2012. It was a direct transfer from one custodian to another. Prior to filing taxes this year, I called the prior custodian and asked if I am getting any 1099 form. The former custodian said that because it was a direct transfer, I do not get any tax form.

I recently discovered that the new custodian made an error and put one of my traditional funds into a Roth IRA instead of a Traditional IRA during the transfer.

I filled the direct transfer form correctly so the error was not on my part. But the balance of my current Roth IRA has part of my traditional IRA amount prior to the transfer.

Can I get this fixed and if so, how? What is my tax liability if any? I really do not want to do any conversion and what the current custodian to fix it since the error was on their part.


Thanks,
Buddy
Elk Grove, CA

A: What you have is an inadvertent conversion of a regular IRA into a Roth IRA due to a custodian's administrative error. Fortunately, the IRA rules provide for an automatic extension of time to recharacterize the funds back to a traditional IRA. The deadline for recharacterizing the erroneous conversion is the due date for your 2012 income tax return including extensions (whether you requested an extension or not). This amounts to an automatic 6 month extension until October 15, 2013 to recharacterize the funds and avoid triggering the tax on the erroneous conversion.

Here's what you need to do. First, calculate the amount that you need to recharacterize consisting of the initial amount erroneously converted to the Roth IRA plus earnings on that amount to date. Next, have the Roth IRA trustee transfer the amount calculated in the first step to a traditional IRA. Third, make sure the IRA custodian that made the error issues a corrected 2012 1099-R reporting the recharacterization. The 1099-R should have code "P" in box 7. Finally, report the recharacterization on your 2012 income tax returns, if you have not already filed them, or on amended 2012 income tax returns, if you have already filed. Use IRS Form 1040X to amend your federal return and FTB Form 540X to amend your state return, if necessary.

You will need to enter the information from the corrected 1099-R and attach a statement to your 2012 income tax returns, or amended returns as appropriate, explaining what happened and stating that you are recharacterizing the erroneous conversion back to a traditional IRA.

Be sure all of this gets done by October 15, 2013, if possible. Your new IRA custodian should be more than willing to help you with this matter. If you cannot accomplish the recharacterization by October 15, 2013, there is a procedure for obtaining a "non-automatic" extension of time to make the recharacterization. It requires requesting a letter ruling from the IRS allowing you additional time beyond the automatic six month extension to complete the recharacterization. That usually requires hiring a tax attorney. So don't delay in taking the steps necessary to recharacterize the inadvertent conversion.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

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Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

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Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

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Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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