Closed a R-IRA acct in 2018. Deposited the check (payable to Vanguard) into a T-IRA by error. What's the best way to move money to Roth IRA from T-IRA to reduce tax?

[jenny-lee635]

Bank issued a 1099-R so we reported on 2018's tax return as a roll over within 60 days. Vanguard will not issue a 5498 because they think it's a direct transfer(we did not receive the money).  Bank is willing to changing the code as a direct rollover.  We don't want to do a Roth conversion because it was Roth money before.  What can Vanguard to to avoid complicated reporting and unnecessary tax? Any reporting to the the IRS? Thank you.

[dmertz]

This is always a messy situation.  A rollover from a Roth IRA to a traditional IRA is not permitted, so this is technically a regular distribution from the Roth IRA and a new, independent contribution to the traditional IRA.  The contribution to the traditional IRA.

You have until the due date of your 2018 tax return including extensions to obtain a return of contribution from the traditional IRA.  You'll need to convince Vanguard that their handling of this as a direct rollover is erroneous because the traditional IRA was not eligible to receive this as a transfer and have them make a return of contribution from the traditional .  You can then make a late rollover of the Roth IRA distribution under Revenue Procedure 2016-47 due to either financial institution error or due to the money being deposited into an account that you though was eligible to receive the rollover but actually it was not.   https://www.irs.gov/pub/irs-drop/rp-16-47.pdf

[dmertz]

Before proceeding with removing the funds from the traditional IRA, be sure that Vanguard will accept the late rollover to the Roth IRA.

[jenny-lee635]

Hi dmertz, thank you for your answer.  I understand the process now.  I left out some details in my question.  The check was issued in 12/31/2019.  Vanguard returned the check to the bank due to lack of instructions from us, which account to deposit check.  It was in late March when we received the check from the bank.  We redeposited check into Vanguard on 3/25/2019 which was after 60 days.  Called Vanguard who said have the bank to reclaim the asset.  Vanguard said that the bank made a mistake by not obtaining transfer paper from them first.  Called bank, they don't want to reclaim the asset.  Bank admitted they made a mistake and willing to re-code this transaction as a direct roll over.  Will reclaiming the asset back by the bank simplify the process?  How do we undo the 1099-R 60 day roll over on 2018's tax? Thank you very much for your time.

[dmertz]

Did you receive a 2018 Form 1099-R for any of this?  It seems that you should not have.

I assume that you mean that bank issued the check on 12/31/*2018*.  The term "direct rollover" only applies to transactions involving an account in a qualified retirement plan, not to transactions involving IRA accounts on both ends of the transaction.  Hopefully the bank actually means that they will code internally it as a trustee-to-trustee transfer where they were both the originating trustee and the receiving trustee, making it neither a distribution nor a rollover and therefore nonreportable.  That seems reasonable since the check was not made out to you personally and you therefore never had control of the funds.  If the bank treats it as a trustee-to-trustee transfer back to them they should not report it on either a 2018 Form 1099-R or a 2019 Form 5498.  Even if the check had been deposited successfully to a Roth IRA for your benefit at Vanguard, this would still have been a nonreportable trustee-to-trustee transfer.

But now I'm a bit confused.  Did the bank issue a new check in March or send the original check back to you to resubmit the transfer to Vanguard?  Given mention of the bank reclaiming the funds, I'm guessing that the bank reissued the check, perhaps made out differently according to Vanguard's requirements for accepting a trustee-to-trustee transfer.

Had the check been made out to you personally then it would have been a distribution that would normally be subject to a 60-day rollover deadline and the distribution and its rollover would be reportable.

In my opinion, bank personnel are often rather inept when it comes to dealing with IRAs, so you really need to know more about how things are supposed to work than they do so that you can intervene appropriately when they go off track.  That's one reason I've studied so much of the IRS documentation and the tax code with regard to retirement account.  I also always recommend initiating the transfer of an IRA at the receiving trustee so that the receiving trustee can provide the preferred way of designating the payee of the check or wire transfer.  That usually leaves less room for the original trustee to mess things up, but it appears that things got messed up anyway since the funds did not end up in a Roth IRA.  A check for a trustee-to-trustee transfer of a Roth IRA to a Roth IRA at Vanguard would most properly be made out to something like "Vanguard, custodian, FBO Jenny Lee Roth IRA,"  effectively making it payable to your new Roth IRA account.  That leaves no doubt that the funds are intended to end up in a Roth IRA and the originating trustee can have some confidence that it will constitute a proper trustee-to-trustee transfer if the originating account was also a Roth IRA.  It also puts the blame on the receiving custodian if the funds end up in an account that is not a Roth IRA, perhaps allowing the receiving custodian to make a correction as a correction to a bookkeeping error.

(With regard to IRAs, the terms "trustee" and "custodian" are interchangeable.)

[jenny-lee635]

Hi dmertz, , thanks for your reply.   Bank of America gave me a "IRA/Coverdell ESA Withdrawal/Closing request" form.  The box "Early Distribution" was checked.   BOA sent us the original check back; did not reissue another check. The check was made out to something like:  Vanguard FBO Jenny Lee. Didn't not mention Roth IRA account on the check.  At this point, Vanguard said, BOA can reclaim the asset but BOA does not want to do that.  BOA admits that they made a mistake by putting Vanguard as the recipient without getting Vanguard's transfer paper, and willing to re-recode as a direct transfer.  That means we don't have to report it on the 2018 tax return.  But the 2018 tax return has already been filed reflecting the 60 day roll over.  That has to be fixed so does the money sitting in the traditional account at Vanguard.  Thank you again for your time and knowledge.

[dmertz]

Presumably there were no taxes withheld from this and the 2018 Form 1099-R that you received had a zero of blank box 4.  Because the check was not made payable to you personally, the BOA person originally prepared the request from incorrectly by marking it as "Early Distribution" in the first place, so it's appropriate that they change their internal coding to direct transfer.  In doing so, they must issue to you a corrected 2018 Form 1099-R showing $0 in boxes 1 and 2a.  When you receive this form marked CORRECTED, you'll then amend your 2018 tax return to remove the reporting of a distribution and rollover.

[jenny-lee635]

Hi dmertz, you are correct, there is no tax withheld.  So I will be waiting for a corrected 1099-R and amend 2018's tax return.  For moving the money out of the traditional IRA, I will call Vanguard to see if they will let me do a late roll over of Roth IRA distribution.  Thank you and I will update you.