IBA Compliance Connection

Your go to source for compliance!

A customer had a pension plan in Oregon that she rolled over into a Roth IRA at our bank last year. She received three distributions from that IRA last year. However, the customer just received a 1099 R notice from the IRS stating that she failed to pay the taxes on the pension prior to the rollover. A representative from our bank’s core processor told us the best way to handle this situation is to wipe out the Roth IRA as if it didn’t happen and start over with a traditional IRA. Is that permissible?

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As we understand the facts, we do not believe that the bank should become involved in determining the propriety of the customer’s handling of the rolled over IRA. It is not the bank’s obligation to determine whether a customer is correctly establishing an IRA account when the account is opened. If the customer subsequently is informed by the IRS that the IRA or distributions made from the IRA are inappropriate, it is the customer’s obligation, and only the customer’s obligation, to remediate the situation. Likewise, if the customer closes out the Roth IRA and establishes a traditional IRA, it is not the bank’s obligation to determine whether that IRA is appropriate for the customer under the circumstances.

For resources related to our guidance, please see:

  • IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) (“You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. This is called recharacterizing the contribution.”)

  • IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) (“To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. If the transfer is made by the due date (including extensions) for your tax return for the tax year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA.”)

  • IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs) (“To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. You must make the notifications by the date of the transfer. Only one notification is required if both IRAs are maintained by the same trustee. “)