IRA Custodian Mistake - Did not implement Roth Conversion

[401_4_ever]

An IRA custodian receives a request to perform a substantial (in the six figures) Roth conversion from an traditional IRA into a Roth IRA during 2014. The custodian now realizes it never performed the conversion but has all of the materials it would have asked for to complete the transaction during 2014. Is there anything the custodian can do? If this were a qualified plan, EPCRS would dictate a result but it seems like the account holder is stuck. Is the only possibility to have the custodian go get a private letter ruling?

[Lou S.]

I'm far from an IRA expert but short of a private letter ruling I'm not sure what can be done.

[mbozek]

I don't know how a PLR can be issued because there is no adverse tax consequence due to the failure to transfer the funds to a Roth IRA in 2014. It is a non taxable event for which there is no remedy under the IRC. Under the IRC a Roth conversion is taxed in the year the funds are distributed from the Traditional IRA. Failure of the custodian to transfer the TIRA funds in 2014 cannot be corrected by restating a 2015 transfer as having occurred in 2014.

IRS cannot waive a magic wand and deem the transfer to have occurred in 2014 because it has no authority to change the tax law.

By failure to perform the conversion do you mean the custodian failed to transfer the funds to the Roth IRA or do you mean that the custodian made the conversion but failed to document the transfer on the records of the Roth IRA account?

[John G]

If the custodian made the transfer, but did not designate the new account as a Roth, I think there is a narrow window of opportunity for the custodian to correct the problem. While an after the fact fix might not be legal, I have seen "errors" get corrected way into the next year.

I do note that the person who requested the conversion had a responsibility to track the completion. While they do not have the primary responsibility, the account holder has some level of negligence.

Can the person make the conversion in 2015? If yes, than they may only be damaged to the extent their tax rate has increased. I would ask the custodian to cover this cost as part of "errors and ommissions".

Most custodians have a low level of mistakes. You don't mention who the custodian was in this example. You may want to consider a direct custodian to custodian transfer of your account after the problem is addressed.