Incorrect year designation on Roth IRA

[Guest Ranbo]

In April 2005 my wife and I each contributed $3000 to our Roth IRAs at Scottrade. We thought we had contributed for the 2005 tax year, so didn't think about it until February 2006. Now we see that it got applied to the 2004 tax year (most likely due to our filling out the form wrong), and it turns out we weren't eligible in to fully contribute in 2004, due to finally getting some back pay due us.

I called the IRS help line, and they said that since we haven't contributed to 2005, Scottrade could change the year of designation on it. The guy at the IRS said "This is completely legal, and we are totally fine with it." A guy at USAA (with whom I also have an account) said that they do that sort of correction all the time, and it just requires submitting a 5498 with the "corrected" box checked.

Scottrade, however, keeps saying that it's an excess contribution, which apparently requires filling out a 5329, and paying all sorts of penalties, though I keep getting different stories on even that part of it. It's especially frustrating because the guy at the local office isn't able to actually fix the problem, and nobody will let me talk to anyone except those at the local office.

The sense I am getting is that Scottrade does not have to make the change, but that they could if they were willing to.

If I end up having to do this the painful and expensive way, I'm very confused about what penalties I have to pay and what hoops I have to jump through.

[Bird]

To be honest, I don't deal with this end of reporting at all, but my take on it is that it is no big deal to file a corrected 5498, and that Scottrade is being ignorant and/or lazy, and you just need to make a bigger fuss. It's probably just a matter of getting to the right person, who understands what you want.

[John G]

I concur with Bird. These kinds of mistakes get made all the time. Scottrade has small local offices that seem to be independent franchises. The local guy may not be knowledgeable in all areas. I recommend that you call the main office and ask to speak with the IRA department not just the first person who answers. The "back room" IRA desk handles these issues fequently. Ask them to correct the year designation.

TO ALL - - this post shows the value of checking your monthly statements to ensure that money gets posted correctly! I recently took a $4,000 check to Etrade with a letter of instruction and they somehow put the funds in my daughters brokerage account rather than her Roth. Don't assume your custodian gets it right. You MUST check your statements.

[Guest Ranbo]

I recommend that you call the main office and ask to speak with the IRA department not just the first person who answers. The "back room" IRA desk handles these issues fequently. Ask them to correct the year designation.

The problem is that Scottrade doesn't let you contact the main office nor the IRA department. Calling the national number redirects your call back to the local office. I'll keep battling, though. It would be easier if it were totally their fault, but we did fill the form out to say 2004, even though we intended 2005 (at it was 2005 when we contributed it). Still, though, it would be so easy for them to fix and so painful and expensive for us to do it on our end.

[John G]

Another example of poor customer service - made worse because of the dumb reason. I called the Colorado Springs office of Scottrade and they made this suggestion: go to your local office again, speak to the office manager or senior person in charge, then ask them to call the "back office" in St Louis about your problem. Scottrade staff are trained to confirm technical points with headquarters.

You can also consider writing to the Roger O Riney, President of Scottrade. This is a company that is very fond of their JD Powers award for customer satisfaction.... so you might want to CC any future correspondence to JD Powers.

Frankly, if you are still not satisfied, then perhaps you should yank your account and take it to another custodian. Keep your correspondence with Scottrade - the IRS might be willing to accept your explaination of the wrong year designation. You can talk with a local IRS office and/or include a letter of explaination with your return.

Post again and let us know if your problem gets resolved.

[Guest Ranbo]

Frankly, if you are still not satisfied, then perhaps you should yank your account and take it to another custodian. Keep your correspondence with Scottrade - the IRS might be willing to accept your explaination of the wrong year designation. You can talk with a local IRS office and/or include a letter of explaination with your return.

I thought about switching brokers, but the guy at USAA says that once the Roth IRA made it over to them, there would be no way for them to correct it. He said that only Scottrade would be able to issue a "corrected 5498" to fix the problem without all the penalties. I heard back this morning from a guy that works at the national office but is temporarily here in town, and he left the same bad answer on my voice mail. I'll continue the battle.

[Guest Ranbo]

I just spoke with Scottrade again. They said that since they have a signed form from us designating the deposit as 2004, that "there is no way for Scottrade to back out of it." He said that if I could get someone from the IRS to state in writing that it was ok to correct it, then they might be able to do so. I guess I could call the IRS help line repeatedly until I finally speak with someone who is willing to mail a letter to that effect.

[John G]

This is very sad to hear. Frankly, the attitude at Scottrade is poor. Even if you put the wrong date down, it is a correctable mistake. Custodians make mistakes. Customers make mistakes. This one can be rectified.

Time to visit a local IRS office and ask them if they will accept a letter of explaination to accompany your return.

[Appleby]

Some valid points were made here, and the suggestions seem only fair. But, as much as I would like to, I cannot disagree with Scottrades’ position. The taxpayer designated the contribution as a 2004 contribution. The custodian is required to report the contribution as per the taxpayer’s designation. If the taxpayer is not eligible for the contribution for the year, then it should be corrected as a return of excess or applied to a later year.

One cannot place too much reliance on responses obtained through contacting the IRS customer service department. From what I hear from clients, they often provide incorrect information. The most recent, they told a client that it is OK to rollover his traditional IRA into his SIMPLE IRA…and they even sent him an E-mail confirmation. After we explained why the transfer should not occur, and showed him the relevant IRS Notice, he contacted the IRS again and as we recommended, he spoke with one of the supervisors in the Employee Plans division, who gave him the correct response.

It is true that the IRS instructions allow for corrected Form 5498s to be issued, but only when the financial institution makes an error, not when the taxpayer makes an error. If the taxpayer is not eligible for the contribution for the year it was designated, the taxpayer should either correct it as a removal of excess, or apply it to a later year.

Sometimes what seems right is not, especially when dealing with the rules that govern retirement plans.

Ranbo, you said “most likely due to filling out the form wrong”. If you are not sure, you should check the forms. If you did not indicate ‘2004’ on the form, then the custodian is required to issue a corrected for, showing the contribution as 2005. If you did, then you (not the custodian) should take corrective actions.

[Guest Ranbo]

It is true that the IRS instructions allow for corrected Form 5498s to be issued, but only when the financial institution makes an error, not when the taxpayer makes an error. If the taxpayer is not eligible for the contribution for the year it was designated, the taxpayer should either correct it as a removal of excess, or apply it to a later year.

Of course I've been trying to apply it to 2005. Does "apply it to a later year" mean filling out 5329 and paying all the fees?

[Appleby]

Unfortunately yes.

Applying it to later year means filing IRS form 5329 and paying the 6% excise tax …6% of the $4,000 for 2004. When applying it to a later year, you need not contact the custodian, as they would not make any adjustments on their books.

.

[Guest Ranbo]

I tried visiting my local IRS office to explain the problem to them. I knew I was in trouble when after saying only "I have a question about my Roth IRA," the lady picked up a chart and said "Just a minute...let's see if I was trained to answer this one...." She knew way less than me, and that's pathetically little.

Then I tried calling the taxpayer's advocate group, too, where you can supposedly get help on problems you can't resolve with the IRS. They were clueless and before I knew it they had transferred me over to the regular IRS help line, where someone told me that Scottrade should file a corrected 1099R. Huh? Isn't that form for distributions rather than for contributions?

Holy cow, doesn't anyone know anything?? Is everyone trained to just make up an answer when they don't know? Since this is the last week before I rack up another 6% penalty, it looks like I'll be bending over and paying a $360 fee for the "excess contribution".

[Guest Pensions in Paradise]

Just a thought, but considering the amount of time you've spent on this issue, why not hire an accountant to assist you? You're not going to get anywhere with the IRS.

[Guest Ranbo]

Well, I finally coughed up the $360 of penalties, but also included a letter explaining why this penalty was unfair and out of proportion. We got several letters back saying "give us another 60 days to get to your question". Then finally a check for around $150 showed up in the mail one day from the government. It may have been a partial refund for this penalty, but there was no letter of explanation. And that's the end of the story.