401(k) Roth Assets erroneously rolled to Traditional Rollover IRA
Upon plan termination, a plan participant’s assets where rolled over in 2012 to a Rollover IRA. It was just discovered that a portion of those assets where Roth 401(k) assets and SHOULD HAVE BEEN rolled over to a Roth IRA. What are your recommended steps to place the ROTH assets into a rollover Roth IRA at this time?
Permalink Submitted by Alan - IRA critic on Mon, 2013-10-07 18:15
There is no specific procedure to correct such an error, and a letter ruling might be required. If this error was caused by the plan, the participant should try to get the rollover reversed, ie transfer the funds from the rollover IRA back to the plan and then have the rollover done correctly to a Roth IRA. Some of the original rollover probably came from the pre tax account and should stay in the rollover IRA. What does the 1099R issued in Jan, 2013 look like? Box 5 should show the amount of designated Roth contributions made to the plan.
Permalink Submitted by John Gingas on Mon, 2013-10-07 18:50
There were two 1099Rs issued from the plan: 1) for regular pre-tax 401(k) account balances and 2) Roth 401(k) contributions. The Roth 401(k) 1099r included a gross distribution of $13,500 (in box 1) and $11,400 of EE contributions (in box 5). Since the 1099Rs are correct, are you still suggesting we move 401(k) Roth monies from Traditional IRA Rollover account, move back to plan and reissue check from the plan to a newly established Roth IRA? Do we pay excess contribution penalties on the ROTH 401(k) monies that existed in the in the Traditional Rollover IRA for the 2012 tax year?
Permalink Submitted by Alan - IRA critic on Mon, 2013-10-07 19:53
The 1099R forms reflect the distribution correctly, but how was the direct rollover check made out? Am trying to determine HOW the error was made, to see if there is an opportunity to apply leverage to that party to assist in the correction. For example, was there two checks made out, one to the Roth IRA of the participant? If so, the IRA custodian messed up. If the check was not made out correctly, then the plan may be responsible, and in that case perhaps they would take the rollover back and reissue the check correctly. If the IRA custodian is a large brokerage firm, they may also suggest a fix for this. It is more efficient to discuss this with the IRA custodian first, to see if they will transfer the Roth portion with allocated earnings to a Roth IRA and not issue a 1099R for it, but that could only happen if the IRA custodian messed up. Finally, does the 5498 reflect what actually happened or what should have happened?