Help, confused: Roth IRA > Traditional IRA > Roth IRA

Anybody able to help with this?

I have a 1099-R ($20k, distribution code 1, IRA/SEP) for this transaction and it seems that I will have to pay taxes as though it was an IRA -> Roth IRA conversion. This could be thousands of dollars and would be totally unfair as it it was incorrectly labled by Etrade, not me.

Please help.

Thanks!

Did you call ETrade? Tell them that you rolled the funds over from a Roth IRA, and it should have been deposited into a Roth IRA, but they made a mistake. But you made a mistake too by depositing it into the wrong account.

That's probably not a good idea as now you have to explain things to the IRS as well. I think it may be possible to undo the conversion from traditional to Roth. There are rules like it has to be done by April/15, or within 6 months from the date you converted to a Roth, or within 6 months of Jan/1, or within 6 months of due date of the 2009 tax return with extensions -- just can't remember what they are. Talk to someone on the phone at ETrade to see what your options are.

For now calculate your tax return without the conversion income, file an extension and pay any tax due. Call ETrade.

Lesson one: Make sure you check after transactions to be sure what was supposed to happen happened.

Lesson two: It's "Ready, Aim, Fire" not "Ready, Fire, Aim." The time to ask for help was before you compounded the problem with this move.

For the moment, as already suggested, file for an extension, assuming zero income from this mess. Then get to work moving things back to the point that the only error is e-Trade's.

1. "Recharacterize" the conversion back to traditional.
2. Recharacterize your 2009 contributions from traditional to Roth.

You have until 10/15/2010 to complete tasks 1 & 2. At this point you can file your 2009 return showing the 1099-R Box 1 amount on line 15a and zero on 15b, attaching an explanation per the Form 8606 instructions.

Once that's done you're back where you started. Raise holy hell at e- Trade until they fix it.

Phil Marti VITA/TCE Volunteer

Thinking about it some more, this might be more complicated. There might be profits in the traditional IRA because there were several stock trades. In this case, the profits remain in the traditional IRA (ie. they are not converted or moved over), right?

No. In a recharacterization the earnings go along with th original transaction. Note that it's not specific securities/earnings, but the overall account balances at different times. The computation method is explained in Pub 590, but it's been my (perhaps lucky) that the custodian will do the calculations.

Phil Marti VITA/TCE Volunteer

Thanks so much for the explanation. I am getting assistance from H&R Block (hope they don't screw thing up royally). Will be filing an 8606

I have talked to Etrade, they see their error, but insist that the final conversion I made (rollover -> Roth) has to generate the 1099-R They say they have no control over this.

I am a little confused on the "Re-characterize" the conversion back to traditional. Do you mean the final conversion (which was traditional to Roth)? Are you suggestion that I Undo the final roth conversion, then somehow hope I can get Etrade to undo the initial conversion to Traditional? I already tried this when i discovered the error. Etrade said it could not be done. That was why I followed their suggestion to convert it to a Roth IRA again. You are right though... this sounds insane that they wouldn't fix the account-type mismatch.

They are correct. You will handle that with the explanation of the recharacterization attached to your return.

But according to what you wrote above, they now admit that they erroneously tagged the account as a traditional. There is no such animal as "conversion to traditional." What you're doing by recharacterizing the conversion is putting things back the way they were immediately after e-Trade's error. Then e-Trade relabels the account as Roth (not "converts") and all is well.

Phil Marti VITA/TCE Volunteer

This is what I requested initially when I discovered the error. Etrade said this was not possible. They therefore said I should do the conversion (which go me into this mess).

The tax adviser I am working with seems to think a simple explanation will suffice. Does this make sense, or is she just crazy?

==================================================================Roth Recharacterization Statement when Form 8606 is not required.

Recharacterization of Conversions

05/18/2009 AMERICAN FUNDS ROTH IRA WAS TRANSFERRED TO ETRADE AND IN THE PROCESS WAS ACCIDENTALLY DEPOSITED INTO *TRADITIONAL* IRA ACCOUNT (****-***7). ETRADE WAS AWARE OF THE MISTAKE, YET STILL ALLOWED FUND TO BE DEPOSITED INTO WRONG ACCOUNT TYPE. TAXPAYER MADE 2009 CONTRIBUTIONS BEFORE REALIZING THE ERROR. ON DECEMBER 14TH, 2009, TAXPAYER DISCOVERED ERROR, CONVERTED ALL FUNDS FROM ETRADE ACCOUNT (****-***7) INTO PROPER ROTH IRA ACCOUNT (****- ***1). *TRADITIONAL* IRA ACCOUNT (****-***7) WAS CLOSED DECEMBER 14, 2009.

Recharacterization of Contributions

$4000 CONTRIBUTIONS (TO ABOVE ACCOUNT) WERE INTENDED AS ROTH IRA CONTRIBUTIONS. ON 05/18/2009 A $2000 CONTRIBUTION INTO TRADITIONAL IRA ****-***7 ON 04/28/2009 A $2000 CONTRIBUTION INTO TRADITIONAL IRA ****-***7 ACCOUNT NUMBER ****-***7 WAS SET UP INCORRECTLY ON 05/18/2009 AS A TRADITIONAL IRA WITH ROTH ACCOUNT FUNDS FROM AMERICAN FUNDS. TAXPAYERS INTENT WAS TO PUT THE INITIAL $****** INTO A ROTH ACCOUNT. THE 4000 CONTRIBUTIONS FOR 2009 SHOULD ALSO HAVE BEEN GOING INTO A ROTH ACCOUNT.

It does make sense to me. Let's see what Phil says. However, one question I had: does the whole return have to be paper filed, does the explanation go on form 8275, does the attachment just go on a blank sheet?

Makes sense to me, now that e-Trade is on board. Just one question that I can't answer since I haven't made a contribution in years. Are Roth and traditional contributions labeled as such on the custodian's report to the IRS? (Form 5498?) If they are, how are the 2009 contributions going to be reported?

Phil Marti VITA/TCE Volunteer

Okay, well taxes were just filed. Was done on a sheet titled "Roth Recharacterization Statement when Form 8606 is not required."

Crossing my fingers :-)

Thanks for all the assistance!

-Jonathan