Broker converted half (instead of all) my IRA to Roth IRA by Dec 31-Fi

[Guest joanne]

Discount broker was supposed to convert my entire IRA account to a Roth IRA. I just got my statement and only stocks and 2 mutual funds were converted. A Money market and a mutual fund are still in the old IRA. The answer I got from them was "too bad, nothing can be done, even if it was their mistake". I wanted the whole IRA converted in 1998. Am I stuck with this mess?

[Kathy]

I would be interested in knowing when you provided the necessary paperwork to the brokerage firm to convert the traditional IRA to a Roth. The brokerage firm does not always have a lot of control over how long it takes to move the underlying assets, Mutual Funds in particular. Many Mutual Funds put drop-dead dates of December 15, 1998 to convert assets from a traditional to a Roth in order to ensure they could get the transactions completed in a timely fashion. We told people we would do the very best we could right up to the very last minute but if they waited until the last minute, we warned them it might not happen, especially if we had to get the paperwork together to get it to another firm that was just as backed up as we were.

[Guest joanne]

I brought the paperwork in person to their office on Monday,Dec 28 and they said that was fine, as the 28th was the last day. All of the mutual funds, money market, and stocks were held in one IRA account at the same discount broker, so they did not have to go to any other firm to conduct the transfer, if I am understanding this process correctly. They opened the Roth account on the 29th and tranferred some of the assets on the 30th. I don't understand how they would have any trouble at all transferring their own money market fund from one account to another.

[BPickerCPA]

As far as the IRS is concerned, the conversion was not done on the other assets. There is no recourse on their end; if it wasn't done, it wasn't done.

Whether you have recourse with the broker is another matter, which you would have to discuss with an attorney.

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[Guest John R Grossmann]

You have a major beef with the brokerage if you qualified for a conversion in 1998, but will not qualify in 1999. If you can qualify to convert in 1999, then your potential damages might be considered loosing the 4 year spread on taxes and any additional taxes owed because of the growth in the assets in the last few weeks. The brokerage might find some way to "fix" this problem if you get someone in senior management to respond. Lots of transactions get back- dated when mistakes are discovered.

[Guest lminsky]

Although some in the industry may "fix" the problem by back-dating the paperwork - I am sure Mr. Grossmann would not advocate this approach as a way to correct a missed tax deadline. If the brokerage suggests tax fraud, I recommend that you find another way to "fix" the problem.

[Guest art]

You asked if this was fixable. Of course it is. During each of the next four years convert one quarter of the remaining IRA to a Roth IRA. The tax effect will be the same. And then, change brokerage firms.

[Guest John R Grossmann]

Art's prior comment is somewhat off target. Joanne may not even be eligible for a Roth conversion in subsequent years. If she is eligible in 1999, the tax consequences of a 1/4 conversion for four years is not the same since your taxes are calculated on the appreciated value of the assets for each packet that converts. For example, you would probably prefer an early Roth conversion if you had assets like Dell stock in your portfolio. If the market were to plunge, Joanne may actually be able to convert assets at a depressed price with a lower tax impact. She might also have differences in tax rates.

Concerning a "fix" by the brokerage, I was not encouraging illegal activities. However, all brokerages have admin proceedures for cleaning up mistakes. This applies to wires that are misdirected, transfers of stock to wrong account, etc. If the assets had been incorrectly placed in another customers account, they could clearly "fix" the problem. In this circumstance, the problem was a lack of action by the broker, the kind of error that Joanne may not be able to get corrected.