Roth IRA Recharacterization or ?

[Guest ATM]

Hello,

In 2006, I had ~80 shares of VQNPX in a Vanguard Traditional IRA. In an attempt to consolidate to ETrade, I performed a transfer from Vanguard to ETrade. In the process, I moved the shares into a Roth IRA account (assuming that the amount would be treated as income, and that I would owe the tax on it).

Unfortunately, I've discovered that I was not supposed to add anything to my Roth IRA account because I would be (am) in excess. As a result, my goal is to "un-do" the operation and move all of the shares back to a Traditional IRA (this time, using my Traditional IRA account with ETrade).

From what I've read on this forum (and other places), it seems like there's at least 1 or 2 options. I'd hate to make another mistake because it would seem that I don't know what I don't know yet. So, I have the following questions:

1) Is this the correct approach? Am I asking the right questions?

2) I'm assuming that ETrade can help me with this. If I contact them, what specifically should I ask from them? i.e. Am I asking them for a "Recharacterization" of those shares, or am I asking them for a "return-of-excess" ? Are these the same thing?

3) Should I be working with another professional, and not ETrade to help with this activity? If not ETrade, then who would you suggest?

4) The stocks have increased in value, and paid dividends which were automatically reinvested as new shares. Is the increase in value/shares treated any differently, or can I simply move 100% of the shares back to a Traditional IRA?

Thanks in advance!

Cheers,

-Alan

[John G]

It is not clear if you have excess contributions or did a Roth conversion when you were not eligible, or both.

You may find that dealing with a discount broker on a special situation like this will try your patience. First, start by talking with the branch manager at your local Etrade office. A few years ago Etrade staff were reluctant to give you the phone number or refer you to the backoffice IRA dept, so start with the senior person at your Etrade office. Then see if they will refer you to the specialists in the main office - I think that is St Louis.

Once connected to the right person, they should be able to handle your problem. These problems happen a lot. Basically, they need to look at the contribution and the conversion and allocate the gain or loss between the two. Its messy but not impossible. Frankly, if you were not striving for perfection, you could probably do the math on one sheet of paper. Etrade can either return excess contributions, or recharacterize your Roth or both, depending upon your circumstances.

[Appleby]

I too am not sure what exactly occurred.

If you moved the assets from a Traditional IRA to a Roth IRA, that would be a Roth conversion and not a transfer. The Roth conversion would be reported on IRS Form 1099-R ( issued by Vanguard) and 5498 ( issues by E-Trade) and should be included on your tax return.

If the transaction was in fact processed as a transfer, one of two mistakes occurred:

1. The transaction was processed as a transfer in error, resulting in no tax reporting being done by the IRA custodians
   
2. The receiving account should have been a Traditional IRA
   

Questions:

1. Was your intent to have the transaction processed as a conversion?
   
2. Was it processed as a conversion?
   
3. Was any tax forms issued (you should have received any 1099-R by now)
   
4. What exactly do you mean when you say “, I've discovered that I was not supposed to add anything to my Roth IRA account because I would be (am) in excess.”
   

[Guest ATM]

John,

Thanks for the response.

It is not clear if you have excess contributions or did a Roth conversion when you were not eligible, or both.

This is a perfect example of where I get myself into trouble. When I read on the subject matter, I read certain terms like "excess" and "not eligible", and I think that I understand them properly. If I assume excess to mean that I'm allowed some Roth contribution, then I believe that the proper answer is that I was not eligible simply because I exceed the income requirement for any amount.

... Once connected to the right person, they should be able to handle your problem. These problems happen a lot. Basically, they need to look at the contribution and the conversion and allocate the gain or loss between the two. Its messy but not impossible.

OK. I'm with you this far.

Frankly, if you were not striving for perfection, you could probably do the math on one sheet of paper. Etrade can either return excess contributions, or recharacterize your Roth or both, depending upon your circumstances.

When I read this, it would seem to suggest that I can actually perform changes on my own, without assistance.

Thanks again.

-Alan

[Guest ATM]

Appleby,

Thank you for the response. Some of what I understand about this problem came from your posts. I'm hoping to use your knowledge for good, instead of evil

I too am not sure what exactly occurred. If you moved the assets from a Traditional IRA to a Roth IRA...

This is what I did.

that would be a Roth conversion and not a transfer.

I'm not sure that it was treated as a Roth conversion. I say that because Vanguard offered me no 1099-R as you've suggested that they should have done. I confirmed this by both reviewing all letters/emails from Vanguard, as well as using my online account to verify what forms were available. As far as the E-Trade 5498, I don't believe that I have any because I didn't receive anything by mail. I haven't been able to find the online tax forms to verify (still looking at this point).

If the transaction was in fact processed as a transfer...

I believe that this is what's happened.

...one of two mistakes occurred...

OK, I understand these mistakes. As I see it, I'm the one that instructed Vanguard to send the assets to ETrade account #xxxx. Vanguard performed the transfer (as opposed to conversion) per my instructions (i.e. the form that I filled out and submitted). So, the mistake is (perhaps) that no tax has been reported.

I know that I answered these questions above, but I'll reiterate anyway...

Was your intent to have the transaction processed as a conversion?

This was my original intent. In retrospect, a conversion was a mistake.

Was it processed as a conversion?

Based on your comments, and based on what I know, I don't believe so.

Was any tax forms issued (you should have received any 1099-R by now)

No 1099-R from Vanguard. Still verifying the (lack of) 5498 from ETrade.

What exactly do you mean when you say “, I've discovered that I was not supposed to add anything to my Roth IRA account because I would be (am) in excess.”

My income was too high to qualify for any Roth contributions. As a result, I don't believe that I was able to qualify for any conversion either.

Thanks again for your time and help!

Cheers,

-Alan

[John G]

I hope I did not mislead you about the "do it yourself" part, which I only meant to refer to making simple calculations of gains on the account. It sounds like you may need to completely unwind the decisions if you were not eligible. You should not file you tax return for 2006 until you get this straightened out - - which means you have to October 15. Given what you have said about the two custodians and your intentions, you will need to work with Etrade to correct the problem.

Thanks for posting the clarifications.

[Guest allancoleman]

Reading this thread about a possible need for a " recharacterization " of a Roth conversion makes me realize why I do most of my Roth conversions in the fall of every calendar tax year when I'm more certain of my income for that tax year . And although I've read the IRS paperwork necessary for a recharacterization of a Roth conversion and I think I could do one by myself , I'd feel much better if the custodian of that Roth assisted me in that task .

And John G is correct , ATM , it's alot easier done now than later after you've had a period of taxfree gains in that possibily invalid Roth conversion to account for in a tax return later . Good luck and let us know how it goes cause there's other potiential Roth conversion investors out there who will learn from this exercise . Myself included .