401k rolled into IRA -some of the funds should have been Roth

Submitted by Pam Hocevar on Mon, 2023-08-14 15:28

Advisor executed the rollover in December 2021. Subsequent to the rollover. It was conferred with the custodian and we were informed that the rollover was accurately processed, and the 1,251 shares would remain registered as Roth shares. Based on this information, the advisor directed the next custodian to transfer those shares (approximating 110k) from the account that we later discovered contained non-retirement money into his Roth IRA at TD. My intention now is to withdraw that ineligible contribution – the conundrum lies in calculating the gains associated with the contribution since the 1,251 shares were sold and diversified.

If the advisor were to provide a ballpark estimate of the gains, would you foresee any potential problems with this plan? Any suggestions here.

Thank you!
Pam



Submitted by Alan - IRA critic on Mon, 2023-08-14 17:21

  • If these were formerly Roth 401k funds, and an error was made in the rollover process, before treating this as an excess contribution, perhaps Rev Procedure 2020-46 should be reviewed to determine if the 60 day rollover period can be extended in order to have the incorrect taxable distribution in the past to be reported as a rollover to the Roth IRA instead. Of course, there are time limits for using this procedure and it will require custodian cooperation. A link to the procedure is attached below:
  • Microsoft Word – rp-20-46.docx (benefitslink.com)
  • If this method can be applied, the current Roth IRA would not contain an excess contribution and Roth status would be preserved.
  • If not workable, if the excess contribution was made in 2022, the deadline to timely correct it by the usual method is 10/15/23, but only if the person filed their 2022 return on time or filed a timely extension. Calculation of gain or loss on the excess contribution follows the usual formula which only involves the change in value between the contribution and removal dates. Sale of shares is not a factor. 
  • NOTE: If the original 401k rollover was done correctly, the 1099R forms and 5498 forms should match up. It sounds like this error would have caused a mismatch and an incorrect 2021 tax return. More details about this error would help.

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