IRA Mistake – How to Correct

Submitted by Kim Bradley on Fri, 2020-02-07 21:55

My husband switched employers in July 2019. He rolled his Traditional 401(k) into a Traditional IRA at our local credit union. In preparing to file our taxes, we questioned why the 1099-R tax form we received was coded as an “H”, since that code corresponds with a Roth 401(k) to Roth IRA rollover. After some research, his former employer determined that his funds were never in a Traditional 401(k) – they were actually in a Roth 401(k). How do I attempt to correct this?

Do I remove the funds from the Traditional IRA as a Prior Year Excess Contribution? The funds clearly need to be deposited into a Roth IRA, so after he opens a Roth IRA, how do I code the deposit?

Any help that you can provide is most appreciated!



Submitted by Alan - IRA critic on Sat, 2020-02-08 00:20

  • That would make the problem worse. While this will be difficult he must immediately take the 1099R and account statements establishing that this was a Roth 401k to a senior staffer at the CU. The CU will have to retitle the IRA as a Roth IRA, and amend the 5498 filing they are about to make to report a Roth IRA rollover contribution for 2019. Any 1099 R from the TIRA will result in double taxation because he has already paid taxes on the money contributed to the Roth. A conversion will have the same double tax consequence.
  • This may be harder to correct at a bank or CU than at a brokerage firm, so he needs to talk to someone who understands the issues and has authority to correct this the right way. 
  • A Roth 401k balance is not even eligible to be rolled into a TIRA account. The direct rollover check should have been made payable to the “CU FBO (husband) Roth IRA”. Most likely if the check was made so payable, the plan is blameless for this error. However, if the check did not specify “Roth IRA”, the plan issued an incorrect rollover check. And if the check did indicate “Roth IRA”, the CU should never have deposited it into a TIRA account. They should have stopped the process and investigated right then. Tax code Sec 402(A)(c)(3)(A) is copied below clearly indicating that this rollover cannot be made into a TIRA account.
  • “(3) Rollover contributions(A) In generalA rollover contribution of any payment or distribution from a designated Roth account which is otherwise allowable under this chapter may be made only if the contribution is to—(i)another designated Roth account of the individual from whose account the payment or distribution was made, or(ii)a Roth IRA of such individual.”  

 

Submitted by Alan - IRA critic on Sat, 2020-02-08 00:29

Continuing the above, if the CU knows how to correct this within their systems, it should not take more than a couple weeks. You can then file your 2019 return and simply report a direct rollover on lines 4c and 4d of Form 1040. This direct rollover is not taxable, but you will need to update his Roth IRA recordkeeping to update the regular Roth IRA contribution basis by the amount in Box 5 of the 1099R (or Box 1 if the Roth 401k was qualified (5 years and he is 59.5). If the CU is actually working on this, you may have to file an extension for the return. If the CU refuses assistance, they you will have to go to Plan B, which is a lot more work, but that can be explained once the CU refuses to change the balance to a Roth IRA. Hopefully they will, because Plan B will be more work, more time, and more costly with respect to 2019 taxes,

Submitted by Kim Bradley on Mon, 2020-02-10 14:12

The IRA at our credit union cannot be retitled. It is an existing Traditional IRA that contains other funds that he’s had for years. There has to be a way to correct this transaction. I have attempted to contact the IRS for guidance, but I get transferred to a department that has a maxed out call volume each time. Please help if you can. The funds obviously need to be removed from the Traditional IRA, but what code should be used? And what code should be used when depositing into the Roth? Thank you for any help that you can provide.

Submitted by Alan - IRA critic on Mon, 2020-02-10 17:37

  • The commingled TIRA makes it much more difficult for the CU to rectify the error directly. They would now have to do an earnings allocation and transfer the earnings adjusted contribution to a Roth IRA. You would probably need proof that this error was 100% their fault to convince them to undertake this.
  •  The Plan B corrective method would take multiple actions. First, the CU should be instructed to process a return of an excess regular TIRA contribution (to the extent he did not qualify for a regular contribution). The earnings adjusted rollover is then returned, and earning on the rollover that occurred in the TIRA will be taxable and subject to penalty on the 2019 return. 1099R for this will be issued next January and coded P1. The final step would be to apply Rev Procedure 2016-47 (link below), to allow the amount of the H coded 1099R to be rolled into a Roth IRA beyond the 60 day deadline. The qualifying reason would be custodian error. Read the self certification form included in the link for more info. In fact, you might be able to use the intention of submitting this form to the CU to convince them to reform the rollover and avoid Plan B altogether. 
  • https://www.irs.gov/pub/irs-drop/rp-16-47.pdf
  • You may need to file an extension for the 2019 return if you cannot get a custodian to accept the certified late rollover in the next few weeks because you need to know someone will accept it before you can then report the H coded 1099R as a rollover of Roth 401k to Roth IRA. This would be non taxable and reported on line 4c and 4d of Form 1040 with “rollover” entered on the line next to 4d.

Submitted by Kim Bradley on Mon, 2020-02-10 20:45

Alan-iracritic,
Thank you for your expert advice. I spent over three hours on the phone with the IRS this morning, and they also advised me to apply Rev Procedure 2016-47 in order to waive the 60-day rollover requirement. They did not seem confident in their advice, so I spoke to my credit union again, who agreed to back these transactions out, open him a Roth IRA, and correct the 5498 tax reporting.

I appreciate you taking the time to help resolve this issue. You are a blessing!

Submitted by Alan - IRA critic on Mon, 2020-02-10 21:39

That is pleasant and somewhat surprising news, as you can now avoid having to use the Rev Proc and make the extra transactions of “Plan B”. Perhaps it is best not to dispute how they calculate earnings while in the commingled account or even if they do not calculate earnings and simply take the amount rolled over and transfer that to a Roth IRA. Monitor the 5498 when it is issued (could be as late as the first of June) to be sure that is shows a rollover contribution to a Roth IRA, and NOT to a TIRA since the prior info has probably already been transferred to their tax Dept for reporting.

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