Roth 401k funds incorrectly put into traditional IRA account at Vanguard

Submitted by Bryan and Ecaterina Davis on Tue, 2023-01-31 19:30

My wife had a 401k with mixed funds, pre-tax and after tax. She no longer works there and the balance was not enough to keep the account open so we asked for the funds to be sent to Vanguard where we have her a traditional and a ROTH IRA. The traditional funds deposited to the “corrrect” account (traditional IRA). The second check with ROTH funds was also deposited into her traditional IRA (money market account). We contacted Vanguard immediately and now, over a month later of back and forth they said it CANNOT BE FIXED and we will have to file and track the funds through an IRS Form 8606 leaving the funds in the traditional IRA. We cannot believe in todays times that there is not a way to correct this 401k rollover. Any advice or assistance will be sincerely appreciated.

Thank you,
Bryan and Ecaterina



Submitted by David Mertz on Tue, 2023-01-31 20:36

  • Is not clear from your post whether the after-tax funds were after-tax funds in the traditional 401(k) account or were contributions she had made to a designated Roth account in the 401(k).  If all of the funds came from the traditional account in the 401(k), there was nothing impermissible about rolling everything over to the traditional IRA and Vanguard is probably correct that no change is permitted.  The fault may lie with the 401(k) plan not properly specifying the destination accounts that were to receive the split distribution.  In a proper direct rollover, receiving accounts are established, the receiving account numbers are provided to the 401(k) plan and the 401(k) plan makes the separate payments payable to the particular destination account for the individual’s benefit.
  • If the after-tax funds were actually from a designated Roth account in the 401(k) and not from the traditional account, correction should be possible since that portion rolled over to the traditional IRA would be a failed rollover and would constitute a regular contribution to the traditional IRA that is eligible to be returned.  Your wife could then make a late rollover self-certifying that this qualifies for a waiver of the 60-day rollover deadline due to financial-institution error.

Submitted by Alan - IRA critic on Tue, 2023-01-31 20:51

  • Vanguard is incorrect. Roth 401k funds are not eligible to be rolled into a traditional IRA and therefore this creates an excess regular contribution to the IRA which must be removed, otherwise she will owe a 6% excise tax for an excess IRA contribution, and she will also have to report a taxable distribution. When did this distribution take place, and if late last year, have you received the 1099R forms yet?
  • What process was used to request these rollovers?  Were they requested through Vanguard?  Were the checks mailed to you for forwarding to Vanguard? Probably no chance that you made a copy of these checks?  
  • While it would be much easier if Vanguard could correct the error, they probably will not unless they were totally at fault for this error.  They would like to wash their hands of this matter, but they really cannot because if they don’t fix it directly, they will have to process the removal of you the excess contribution. WIfe would then request VG to accept a late rollover to the Roth IRA using RP 2020-46. See following link. Reason (a) or (c) applies to this situation.
  • Microsoft Word – rp-20-46.docx (benefitslink.com)
  • This is complex, and you probably have more questions. Feel free to post them.

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