Form 5498 Error

[azk54]

 I  just received my Form 5498 from E*TRADE/Morgan Stanley and I believe there is an error in box 3.  I want to verify what should be included in box 3 before I call customer service for what I'm sure will be a long aggravating conversation.  When I submitted my Roth conversion request  from my Traditional IRA account, I requested that both federal and state income taxes be withheld from the conversion amount. There was an error in fulfilling this request by   E*TRADE that resulted in the state withholding being transferred to the Roth account instead of to my state's Tax office.  

Many phone conversations later this error was corrected  and transactions were added to both the Traditional IRA and the Roth showing these corrections. The balances in both accounts were correct and  the state withholding amount was sent to the state's tax office from the traditional IRA account.  I received a 1099R that showed the correct amounts.   Fast forward to the 5498 that I received today,  

The amount in box 3 equals  Conversion amount requested - federal taxes - state taxes + (state taxes x 2).

It is my understanding that the amount in box 3 should be the net amount of money transferred to the Roth,  Conversion amount requested -federal taxes - state taxes.  This is the actual amount that was deposited in the Roth account and  the amount I entered on form 8606 line 16  when I filed my taxes.  Is this correct? 

[fanfare]

"Conversion amount requested - federal taxes - state taxes + (state taxes x 2)."

This strange expression reflects the original arror which you asked them to correct.

@azk54 

[azk54]

Thanks for your reply.  I agree that whatever E*TRADE did to correct the original error caused this strange number in box 3.  Do you agree that the correct amount for box  3 should be the  net amount that was actually transferred to the Roth after the corrections were made?  

Conversion amount requested - federal taxes - state taxes 

This is the amount I reported on form 8606.  

[fanfare]

Yes, the amount you converted is the amount that went into the  IRA.

By having tax withheld out of the first IRA you lose the potential tax-free growth on that money.

@azk54 

[fanfare]

"I agree that whatever E*TRADE did to correct the original error caused this strange number in box 3. "

That's not what I said. the correction is not reflected in the strange expression.

Where did that stransge expression come from ?

@azk54 

[dmertz · Accepted solution]

It seems that there was a manual attempt to correct the transaction and they incorrectly adjusted the amount in box 3 of the Form 5498 upward instead of downward by the amount that ultimately went to state tax withholding.  Bookkeeping adjustments like this are easily mishandled.

Although it probably would have resulted slightly different amounts of contribution basis and conversion basis ending up in your Roth IRAs, a simpler correction with far less chance for error would have been to simply request a regular distribution from the Roth IRA equal to the amount that they failed to withhold for state taxes and have that entire distribution paid to state tax withholding.  With the exception of the possible shifting of contribution basis to conversion basis, the tax result would have been the same as you had intended.

Where you say "conversion amount requested," I think you actually mean "distribution amount requested."  The parts of the distribution that you requested to go to tax withholding are amounts that you technically requested not to be converted to Roth, so are not part of the conversion amount.

[azk54]

I was trying to show what was entered on my 5498 without actually posting my personal  financial information in a public forum.   I probably could have accomplished the same thing in a clearer manner  with an example.  I appreciate the time you spent trying to assist me with this problem.  

[azk54]

 Ironically, my first thought when the original error occurred was to do what you suggested and just remove the tax money from the ROTH and submit the tax payment myself.  I didn't do that because two transactions were recorded in both the Traditional IRA and the Roth, one for the the net after tax amount, and one for the state tax amount.  The transaction for the state tax amount had a description of state taxes withheld in both places.    

I was concerned that the state tax withheld amount would be incorrect on the 1099R and I thought correcting the error at the source would be better.  I'm going to have to rethink this whole process for this year.    Thank you for your help.  I appreciate your assistance.  

[fanfare]

If the custodian made an adjustment of state Tax in both accounts at your request, your 1099-R will reflect all distributions.

You have to attach an explanation of the final result on your tax return.

Generally , the advice is to include dates and amounts.

You can't explain it to the IRS if you don't understand it yourself.