Accidental moving Roth IRA funds to Traditional IRA account

Submitted by Jordan Grant on Wed, 2020-08-26 14:39

I’ve been working on updating and consolidating my retirement investments. As part of that effort, I transferred some Roth IRA funds to a different brokerage IRA account. I didn’t realize at the time that I was going from a Roth IRA account into a Traditional IRA account. Of course, I’d rather have all those funds remain as Roth IRAs. I want to put the funds back, but I’m not sure what I’ve just done to myself as far as tax implications go. Does anyone have advice on how I should unwind that error with minimal tax and paperwork implications? Thanks for anything you can offer!

Cheers,

Jordan



Submitted by Alan - IRA critic on Wed, 2020-08-26 15:15

  • This is a bad error. It is not an eligible rollover so you have an excess TIRA contribution that must be removed with applicable earnings. You can also complete a Roth conversion if you are still within 60 days of the first distribution. You can use other money if you have it to meet the deadline, otherwise you will have to wait until the excess TIRA contribution is removed to fund the rollover. 
  • You indicated that you transferred the money into the TIRA. Was this done via 60 day rollover or by direct trustee transfer?
  • If the 60 days has passed, you may be able to use Rev Procedure 2016-47 to extend the 60 day rollover deadline using the reason that you thought the TIRA was an eligible retirement plan to receive the rollover. The Roth custodian will have to cooperate with the self certification procedures.
  • If you are able to get the funds where they should be, and the one rollover limitation is not a problem, you still will have a challenging tax filing because your 1099R forms may not fully reflect the additional transactions you will have to make to restore funds to the correct IRA type.

Submitted by Jordan Grant on Wed, 2020-08-26 16:24

I transferred the money in early July, so less than 60 days ago. I did it with a direct trustee transfer, and I have other money available if necessary. I also have never done a rollover.  I was considering just converting the account to a Roth, but wasn’t sure about the tax implications for the “new” funds. If I convert within 60 days, does it just wash? Thanks so much for your insight!

Submitted by Alan - IRA critic on Wed, 2020-08-26 17:22

  • The transfer should have been blocked since a Roth to TIRA transfer is not allowed. There was apparent custodian error in processing the transfer. You should not convert the TIRA since it holds an excess contribution. You must request a return of the excess TIRA contribution (custodian will calculate the earnings to also be returned to you). Since it may take awhile for the TIRA custodian to understand what went wrong here, you will probably have to use other funds to complete the Roth to Roth rollover within the 60 day time limit. This is NOT a conversion, just a Roth to Roth 60 day rollover that will use up your one 60 day rollover for the next year.
  • You also need to attempt to explain what happened here to the Roth custodian so they will issue a 1099R (Coded J if you are under 59.5). You will report that 1099R as being rolled over on your tax return to your Roth IRA, not to your TIRA.  Also, the TIRA custodian must understand what happened to the failed ineligible transfer and why they must treat the transferred funds as an excess regular TIRA contribution which you must have returned with allocated earnings. That custodian needs to issue a 1099R code 8,1 to report the returned contribution . Having these 1099R forms correct will make it much easier to file your 1040 and eliminate having to make a complex explanation to the IRS.  Therefore, because this situation is highly abnormal, you need to talk to the experts at each custodian, not the average CSR that will have no clue how to address this. 

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