In 2020 I checked the “401k conversion rollover” box by mistake (instead of “rollover to IRA account” and rolled the funds into a Traditional IRA. I intended this to be a 401k rollover to an IRA.
The custodian of the IRA account is requesting a certification or letter of indemnity to put the money from the Trad IRA into my existing Roth IRA which is at the same custodian.
What is the best way to handle this?
It depends on the custodian. If they are requesting a LOI it means they are agreeing to something that they think might cause a fine from the Dept of Labor if they find out. As it appears, the rollover was first deposited into a Roth, the advisor told them to change it to TIRA, and now you want to change it back to the Roth. Is this due to large gains in the Roth that occurred over the last year? If this is done, the custodian will have to make sure they have Form 5498 filed correctly to report a conversion contribution or the IRS may inquire into this.
The reason for wanting it back into the Roth, is I paid taxes on $15k due to the 1099R indicating a taxable amount due to the Rollover Conversion. The gain is about $3k. I will have to check on the 5498 being filed correctly. Thank you for that info.The custodian says they need a distribution form for an excess contribution to put it back into the Roth. Does this seem correct?
Yes. It suggests that their rationale is that the original 401k rollover to Roth was correct, but then a rollover was made from a Roth IRA to the traditional IRA which is not allowed. Of course, if it is not allowed why did they process it in the first place? When a disallowed rollover is done for whatever reason it must be treated as an excess regular contribution to the TIRA and removed with allocated earnings. That makes sense, but the 60 day rollover period to roll the Roth distribution back into the Roth has long since expired, so it is not clear how they will justify waiving the 60 days. A self certification form may also be needed in which you are asked to request that the 60 day period be extended due to the contribution being made to a different account (TIRA) than what you thought it was. A mess like this can be unraveled in some cases, it is up to the custodian what tools they want to use in that process. It would help if they would explain how they are treating each transaction made in the entire sequence and how they intend to report all this on Forms 1099R and 5498.
I tried the self-certification form and there appeared to be only 2 choices for Reasons for a late rollover that could apply in my case.1. An error was committedd by the financial institution making the distribution or receiving the contribution. However the custodian is not at fault for the advisor at my mistake had it change to the TIRA.2. The distribution was deposited into and remained in an acccount that I mistakenly thought was a retirement plan or IRA. Would this possibly apply? It’s in an IRA just not the right one.
You should be able to apply the deposit to wrong account reason since different types of IRAs should qualify. Did custodian request the certification form, a separate LOI, and an excess contribution removal form to remove the excess TIRA contribution that had been rolled from the Roth?
The custodian requested an excess contribution form and certification form. Thank you for your response it is much appreciated.I will select the wrong account reason and submit the excess contribution form and hopefully this will satisfy to transfer the wrong TIRA account to the Roth. Should I address any 5498 and 1099R in any manner with the custodian? I have paid the taxes on the conversion.
Permalink Submitted by Alan - IRA critic on Thu, 2021-05-06 22:07
If you checked the “conversion rollover” box it the check should have bee issued to your Roth IRA custodian, FBO you mike Roth IRA”. If your TIRA custodian is willing to move the funds into your Roth IRA now, that seems to suggest that the error was theirs, not yours. If you still prefer that this amount have been rolled to your Roth IRA, knowing that amount will be taxable (2020 taxes or 2021 depending on how they do this), then send a letter of indemnity. The chances are slim that they would fall under any IRS penalty for doing this, but I am still curious who actually made the mistake.
Your post is not very clear because the first paragraph sounds like you wanted the rollover to go to the TIRA, but the second makes it sound like you wanted it to go to the Roth. In any events custodians rarely change rollovers done in the prior year unless THEY made the error.
Remember, you will owe taxes unless the 401k funds were in a Roth 401k before the rollover. If you have already filed your 2020 return, you will have to amend it if this is changed to a Roth rollover.
Permalink Submitted by Michael Casey on Fri, 2021-05-07 01:24
I wanted to treat this rollover as a TIRA and i told my advisor it was a rollover to a TIRA in April of 2020 when the direct rollover was done. The check did not have an account # or designation of account, Just FBO and my name. When the funds were deposited it went into an existing Roth account I had at the financial institution. My advisor noticed the check was not deposited into the TIRA but the Roth and when he asked I told him it was a rollover to a TIRA. He asked the custodian to book it in the TIRA immediately in Mar 2020 and it was. I did not re-look at the distribution form I submitted at that time because I thought I filled it out as a TIRA rollover. When I got my 1099R and saw the distribution was fully taxable , it confused me. So I re-looked at the distribution form I submitted for the rollover and noticed I mistakenly checked the Roth Conversion Rollover instead of the Rollover to TIRA and mistakenly told the advisor it was a rollover to a TIRA. I paid the taxes on the $15k distribution and just want the easiest way to get it into the Roth account where it belongs.Regarding a letter of indemnity. Do you know if financial institutions/custodians normallly take a personal letter of indemnity from the account holder to satisfy them so the transfer can be made to the correct account?