Deadline to convert a traditional to roth IRA for 2003 tax year?

[Guest mawendli]

I know it's not too late to contribute to an IRA, but is it too late to convert a Traditional IRA to a Roth IRA for the 2003 tax year? When is the deadline?

Thanks.

[Appleby]

Yes. The assets should have been distributed/debited* from the traditional IRA by 12/31/2003.

*Roth Conversions may also be done as a distribution from the traditional IRA and a rollover ( within 60-days) to the Roth IRA. The rollover contributions should be deposited with a special ( in house) code so that it is reflected as a conversion instead of a regular rollover.

[Guest trishish]

Hi,

When I left a previous job in 2000, I put the firm's retirement contributons for me in a regular IRA in an online brokerage. Last year I rolled those IRA funds over into my Roth IRA (before 12/31/2003) with the same online brokerage.

Unfortunately, especially after reading the moderator's post below, I believe I must have done this incorrectly as I don't believe a special (in house) code was used so that it would be reflected as a conversion instead of a regular rollover.

I received a 1099-R that states (in box 7) that the distribution code is 2. I am afraid that it should have been distribution code N for "recharacterized IRA contribution made for 2003 and recharacterized in 2003" (which would require me to pay about 1/3 less taxes than the tax software is telling me I currently have to pay).

Is there any way to correct this now, or do I have to pay triple the taxes I should have to pay? I have not handled any of the funds -- they are still sitting with the online brokerage.

Thanks very much for any advice.

[John G]

The first problem I have with your description is that you refer to rolling IRA funds into a Roth. The correct term is "conversion" of funds in an IRA to a Roth. Your custodian should know the difference and not just rolled funds from one account to another. They should have asked you questions about your request if it was unclear.

The first step in getting this issue solved is to read your letter of instruction to the custodian to see if you correctly made the request for a Roth conversion. Then, call the custodian and ask them about how it was processed. If they made a coding error, I believe they can correct it now. This type of problem happens fairly often, and I know from prior experience that custodians will often issue corrected 1099-r forms... can't tell you if it is legal, but it has been done.

Your problem demonstrates the importance of knowing the terminology and following up on requests for action to make sure they were handled correctly.

Who was your custodian? If there are significant amount of funds involved, you may want to hire an accountant or tax specialist to assist you in getting this resolved.

[Guest trishish]

i used incorrect lingo, you're right. i should have said "conversion". the form i used is called "Roth IRA Conversion Form" and the brokerage account is with e*trade.

on the form, i requested that they convert the full amount of the traditional IRA ($12,000) over to my Roth IRA. i then requested that they NOT withhold Federal income tax from my IRA for converstion to the Roth IRA.

in light of the above, perhaps the coding on my 1099-r was done correctly after all?? i have tried to call e*trade to confirm/inquire about this, but according to their voice message system they are taking president's day as a banking holiday and not answering the phone.

it's true -- i was/am inexperienced re: how to process a Roth conversion. i wish i had known about this message board long ago.

[ElGuapo]

I don't think you--or E*trade--have done anything wrong. A "recharacterization" might sound like what you did, but it's a completely different animal from a "conversion." (An example of a recharacterization is when you make an annual contribution to a regular IRA and then decide in the same year you wanted to contribute to a Roth instead, so the IRS lets you pretend you put it in the Roth to begin with.) Hey, it's all semantics, right?

[John G]

You explaination is confusing. It sounds like you put the company funds into an IRA, then "converted" the IRA to a Roth (by moving all the funds from the IRA to the new conversion Roth). I could be that your funds were converted to a Roth, but the year-end paperwork is not coded correctly. I suggest that you call E-trade to confirm how the request was handled and to discuss how the transaction was coded.

The difficult part of dealing with E-trade is getting a customer service rep to answer the phone... actually that is the difficulty with all online brokerages. You may want to ask to be put in touch with the retirement accounts desk which will be more experienced in answering your questions.

[JAMES PATRICK]

If you converted an IRA to a Roth in 2003 the correct code in box 7 is 2. That means there is no 10% penalty. If you have a different code than you did't do a conversion.

[John G]

Patrick, if the letter of instructions were clear and the funds are now in a Roth, is this just an administrative error that can be corrected, or is it a bigger problem because the year has ended?

[Appleby]

trishish,

It does not appear that you have any cause for concern.

As James Patrick explained, the code in Box 7 will be ‘2’, if you are under age 59 ½ when the Roth Conversion occurred. (Code 7 would apply is you were at least age 59 ½ when the conversion occurred). The fact that your 1099-R reflects Code ‘2’ in box 7 shows that the transaction was in fact processed properly- i.e. as a Roth IRA conversion.

Generally, a Roth conversion is done at the same custodian (at which the traditional IRA and the Roth IRA are maintained) --and is done in the manner that you explained- one transaction completed as a Roth conversion according to the IRA owner’s instructions or directly between two custodians.

A Roth conversion may also be accomplished by distributing assets from the traditional IRA and depositing the assets to the Roth IRA within 60-days after receiving the distribution. My response ( to the first post) was more or less addressing this method---as in many instances, when Roth conversions are accomplished VIA this method, the receiving financial institution deposits and reports the credit as a regular rollover instead of as a conversion. In any event, this would only affect the form 5498, which is issued in May (for the previous year). On Form 5498 a special box is designated for Roth conversions.

I should have been more thorough in my response to the first post- my apologies for any confusion caused.