Roth rollover
Four years ago a client rollover over 401k Roth money and the IRA custodian coded the receiving account as a rollover IRA. The error was discovered recently and the IRA custodian is refusing to acknowledge the error. Can this account simply be re-registered as a Roth IRA? No distributions have been taken. Is the best fix having the custodian re-register the account to a Roth? If they refuse what is the best fix?
Permalink Submitted by Alan - IRA critic on Thu, 2024-11-07 16:18
It is highly unlikely that the IRA custodian will recode the account as a Roth or amend the 5498 they issued 4 years ago even if it can be shown that they are entirely at fault. Rolling Roth money to a TIRA is just about the worst error that can be made with respect to the correction process and reporting hassles.
Technically, since a non Roth IRA is not eligible to receive Roth funds the Roth 401k distribution has to be reported as a taxable distribution on an amended 1040X for that year, although only the gains would be taxable. Further, the deposit to a TIRA is an excess contribution to the TIRA and this created an excise tax issue of 6% for each year, which is now late.
The extended time delay has probably negated the possibility of using Rev Procedure 2020-46 to justify a late rollover for custodian error to get the original distribution into a Roth IRA. The Roth custodian would also have to accept the rollover and the self certification form and report it correctly, and this is a long shot that might have been possible had client noticed the error right after it occurred.
It might be useful to know if this rollover IRA already had a pre rollover balance, or was intended to be a newly opened Roth IRA, if the client also rolled over pre tax 401k funds to this rollover IRA and if so if the 401k plan failed to issue separate checks. These failures can be caused in many ways, but if everything else was done correctly and the error was caused totally by the IRA custodian, there is a long shot that they might cooperate in some way.
If the excess IRA contribution is removed before year end, that at least would eliminate the 6% penalty for 2024.
It is also unfortunate that the IRS did not match the IRA 5498 with the 1099R, which would have clearly indicated that the rollover went to the wrong IRA type. The error could then have been addressed before these excise taxes piled up.