Roth IRA setup as a Traditional IRA by mistake by Fund Administrator

[Guest flyboy73]

Hi folks, it took me a while to notice (almost 10 years to be exact), but I have noticed a huge mistake made by my IRA custodian for one of my IRA funds. The IRA was made in 2003 for the 2002 tax year, and I contributed the maximum allowed, $3,000. It was supposed to be established as a Roth IRA, but all this time it has been structured as a Traditional IRA. I have proof that it is their mistake because I have a copy of the contribution form marking it as a Roth, and when I called up the custodian, they acknowledged it was their mistake.

I first spoke with the custodian February 1st, and haven't heard back from them since. I have called a few times, and they say they will contact me when they find a solution. Understandably, this appears to be a very difficult issue for them, but I'm a little concerned that I'm being ignored, as I only have about $5,000 in the fund. All my IRAs are Roths, spread out among several funds, and I very much prefer Roths so that I can withdraw the earnings tax free at retirement, or possibly withdraw from the principal without consequence if necessary, both of which I cannot do with the Traditional IRA. True, I could just leave it as is as a Traditional IRA, but I never took the necessary deduction in my 2003 tax return. Without the benefit of a deduction, I have no incentive to leave it as is as a traditional IRA!

Has anyone run into a similar situation? I feel foolish that I had not caught this mistake sooner, as it was basically staring me in the face on the fund's website all this time, but I need to correct this soon.

I am unemployed with no income at the moment, and imagine I will be for the near future, so the possibility of taking the missing tax deduction this year or next is not feasible. Is there any possibility I could file an amended 2002 tax year return to retroactively claim the missing deduction? And this is assuming the IRA stays traditional. If they were to correct this issue by converting it to a Roth, I would then be stuck paying taxes on the contribution amount, even though it was supposed to be setup as a Roth in the first place with my after tax dollars!?!?!?!? Since it's the administrator's mistake, shouldn't they eat the loss and reimburse me if I have pay the taxes to the IRS to convert to a Roth, or if nothing can be done, they could reimburse me the opportunity costs of not taking the deduction in my 2002 tax return.

Anyways, this is a rather complex situation that I hope to resolve in a timely manner, and I look forward to your expert analysis!

[masteff]

Quit calling them and put everything in writing via the mail from now on, I'd suggest certified with delivery confirmation. Generally speaking, phone reps are first level customer support who have zero authority to fix any real problem. Look on their website or thru their custodial agreement and look for what address to use. If you're using the local office of a bigger firm, then bypass the locals and write to the main office. Be sure to include a copy of the form you mentioned and include information about the phone call on which they admitted it was their mistake.

Oh, and don't even suggest the possibility of them not fixing it. That's not the solution you want. You want them to correctly retitle this account as a Roth, end of story.

Lastly, don't create a false sense of urgency for fixing something that's been wrong for 10 years. Yes, you need it fixed and it's annoying that they're not communicating (which is why you're going to contact them in writing by mail). But you're just setting the situation up to fail if you declare and demand "I need to correct this soon".

[Guest flyboy73]

Thanks for the advice, I was beginning to think along the same lines. It looked like it was going to be a game of phone tag, or their hoping I give up. I'm going to prepare a letter and see how that goes.

If they are able to change this to a Roth, should I be stuck paying the tax bill for the conversion? Would I have any chance of asking them to reimburse me for the tax? Would it make sense to ask them in my written correspondence?

[masteff]

Thanks for the advice, I was beginning to think along the same lines. It looked like it was going to be a game of phone tag, or their hoping I give up. I'm going to prepare a letter and see how that goes.

If they are able to change this to a Roth, should I be stuck paying the tax bill for the conversion? Would I have any chance of asking them to reimburse me for the tax? Would it make sense to ask them in my written correspondence?

Conversion? What conversion? You didn't deduct the contribution on your taxes, did you? It's not a conversion, it's a correction. You should have zero tax ramification.

[Guest flyboy73]

No, I never deducted the $3,000 contribution because it was intended to be a Roth, not a Traditional. I have also asked around, and have found that I am way past the statute of limitations (3 years) for filing an amended return, so an amended 2002 return claiming the $3,000 deduction is out of the question, and I understand that. As for why this issue is taking so long to get an answer to, I imagine it is one of the following:

- They are working with the IRS (who are not noted for their speed of response) in finding out how to correct the issue.

- They believe I share in the blame for not noticing the mistake sooner, and are dragging their feet. When I was on the phone with them the first time, the woman asked about the 5498 form I received, asking about the classification of the IRA on the form. I said it was marked as a "Contributory IRA", and she says that was the first sign to me that it was setup as a traditional IRA, and without saying so directly, I should have noticed and corrected right away.

I just want to get this fixed, at this point I really don't care if it's a Traditional or Roth. If they say I have to convert to a Roth, it may not be so bad, as I have zero income and therefore should not have to pay any tax on the conversion. I know, it should be a correction to a Roth, not a conversion, but I have to accept that it may come to that.

[Bird]

If they admitted it was their mistake then they should fix it. I don't think there's a need for a lot of further discussion or asking the IRS for help.

FWIW I don't see any box on a 5498 that says "contributory IRA", unless they changed the form, and I don't think so. Something is a little "off" about this whole discussion...

[Guest flyboy73]

Remember, this 5498 is from 2003, for a 2002 contribution. It's not a box, but it was typed in on the form to designate the type of IRA.

[GMK]

You marked the contribution form as a Roth contribution.

You paid the taxes.

All that's left is for the custodian to call it a Roth account, and you're done.

If the custodian is not correcting the account characterization, write them a letter (send it certified, delivery receipt requested). Phone calls work only sometimes.

[John G]

While I agree that the custodian made a mistake, you definitely also had some responsibility for confirming that transactions were posted correctly. I think the custodian should correct the error, but I would not be surprised if they say that too much time had passed.

If after a second letter to the custodian does not generate a correction, then I think I would write off the realtively minor cost as "tuition" in the school of life.

WARNING TO OTHERS: Check you monthly statements and annual reports on Roth and IRAs. You want to catch errors quickly. Do not assume that everything is correct and was done in a timely fashion. The "A" in IRA does not stand for "AUTOPILOT". The "I" stands or Individual - and you, the customer, has a vital roll in confirming that everything gets done.