Direct Rollover Issue

Submitted by Kevin O'Hearn on Fri, 2023-04-21 19:20

Hello,

In April of 2022 my client did a direct rollover from a retirement plan to a traditional IRA. Unfortunately it was recently discovered about 20% of this rollover was comprised of ROTH funds held in the plan. Because over a year has passed, the custodian will not allow for any type of deposit correction.

Is the best course of action to distribute the funds from the IRA and recontribute to the ROTH as a 60-day rollover? Or, can the ROTH funds be held in the IRA and distributions will be subject to the Pro-rata rule?

Any feedback would be greatly appreciated, Thank you.



Submitted by Alan - IRA critic on Fri, 2023-04-21 21:21

  • This error is difficult to correct, particularly if it was not detected very soon after the error. That said, Roth 401k funds are not eligible to be rolled over to an IRA, therefore must be reported as a taxable distribution from the Roth 401k on the 2022 return, and not reported according to the 1099R issued. It’s also a 2022 excess TIRA contribution that must be removed from the TIRA in a corrective distribution. Any gain on the excess (probably unlikely if IRA was invested in stock holdings) would be taxable on the 2022 return, but not subject to penalty.
  • There might be a better correction possible with cooperation from the IRA custodian. A late rollover to a Roth IRA might be done per Rev Proc 2020-46, if one of the reasons allowed applies here. Whose fault was this rollover, any chance of a custodian error? Were the direct rollover checks separate checks made out to client’s TIRA and Roth IRA? Any other situations such as a death in the family, client illness etc?
  • If the 2022 return has been filed reporting as intended, if this cannot be fixed it will have to be amended. What codes are on the 1099R forms client received in January?

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