Comingled IRA funds

[Guest TopTN]

With U.S. Bank (Firstar at the time), I had a traditional IRA and a Roth IRA. I transferred these two IRAs to a different bank into two accounts in order to get more interest. A year later, I decided to let an investment representative manage these funds, and they were transferred a third time in April 2003. In August 2003, I discovered that the very first transfer from U.S. Bank was in error as they had marked the wrong box indicating that the Roth was a "traditional" IRA.

When the investment representative received proceeds from both IRAs last April, he combined the funds into one account. I have been trying to get this straightened out since September. I have letters from each of the first two banks indicating their acknowledgment of the error. The investment manager is hesitant to divide the fund back into a Roth and traditional IRA because, he says that it will flag the IRS that I have made another conversion. In the mean time, I can't move my funds.

Does anyone know of a precedent or an IRS guideline to fix this problem?

[BPickerCPA]

As I see it, you basically have two choices.

The first is to go to the IRS and ask for a ruling to permit the account to be split on the basis of the error made when the first transfer was done. I don't you will have any problem getting the ruling, but the process will cost a few thousand dollars if you have a professional handle the ruling request for you (which you should, unless you can read and understand some lengthy IRS rules and procedures)>

The second is to insist that the account be split (making sure that including the gains/losses/income in the computation), and let them mark it as a new conversion, don't report the income a second time, and deal with the IRS if they question the omission.

Your call.

[Appleby]

I agree with Barry. I vote that you try the custodian route (second choice) first.

If the IRA custodian caused the error, then it is very likely that they (the custodian) will accommodate a request to make a correction. The third custodian (the one currently holding the assets) may require some written confirmation from the custodian at which the error occurred, that they have completed any required corrective tax reporting. For instance, if the assets were transferred from a Roth IRA at U.S Bank, to a traditional IRA at let’s say ABC Custodian, ABC custodian may need to correct any tax reporting they did for the IRA…This will help to correct the audit trail so that it reflects all Roth IRA related activity and tax-reporting. The third custodian would move (adjust) the assets from the traditional IRA to the Roth IRA as a non-reportable transaction(so it is not reported on Forms 1099-R and 5498 as a Roth conversion)…and should make adjustment to any tax reporting that they handled for the account for 2003- for instance, the fair market value (FMV) report.

One precedence is Wood v. Commissioner, 93 T.C. 114 (1989).