2025 Roth IRA Conversion Error – Can we redeposit Roth IRA funds withdrawn in error? Miscommunication with custodian
Client (Age 68) made a 2025 Roth IRA conversion from a qualified plan for $100,000. Afterwards, the client decided the tax liability exceeded their budget.
Client requested a return of $50,000 back to the qualified plan. However, the cash was deposited to their checking account, in error, and coded as a partial return of excess current year contribution.
After 2018, recharacterization of Roth IRAs are disallowed.
Roth IRA was opened in 2025 for this conversion, no other Roth IRA contributions are in the account. 5 year waiting period not met. The distribution is not a qualified distribution.
Can the client redeposit $50,000 back into the Roth IRA account to avoid additional taxes and the 10% early withdraw penalty and allow the Roth IRA funds to grow tax-free?
The $100,000 Roth IRA conversion incurred federal and state income taxes payable in tax year 2025.
The broker dealer states that the coding of an return of excess current year contribution does not allow for correction.
The client wants the balance of his Roth IRA conversion to be $100,000 that he already paid taxes on.
What is the solution to correct the error?
Within 60 days of the error, can the client contact the financial institution to explain the error and request that the funds be redeposited back into the Roth IRA and code the deposit as a contribution processed as a conversion contribution and not as a rollover contribution?
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-28 23:11
This is another case where the first mistake is compounded with a second mistake.
Yes, these mistakes are costly since conversions can no longer be recharacterized. While client could have withdrawn some of the converted amount to pay the conversion taxes, there is no excess contribution here and it’s not clear why the Roth custodian processed a return of excess rather than a simple distribution from the Roth IRA. There was no excess contribution to the Roth IRA and the custodian should correct their incorrect coding, which is easily done since no 1099R has yet been issued. The 1099R should be coded as just an early distribution code J, with no 8 code denoting the return of excess because there was no excess contribution.
As for the Roth distribution, if the client has not used up their one allowed IRA to like kind IRA rollover in the last 12 months, they can roll the distribution from the Roth IRA back to the Roth IRA within 60 days. Since there seems to be communication issues with this custodian, the client could instead roll the amount to a new Roth IRA elsewhere and advise that custodian that it’s a rollover contribution.
The amount of the conversion or any portion thereof that has been withdrawn will be tax and penalty free if not rolled back. There is no longer a conversion 5 year holding period after 59.5. If there were any gains since the conversion, the removal of gains would be taxable.
You should also tell the client not to make further transactions without understanding the implications. Fortunately, there is plenty of time for the custodian to recode the recent distribution to eliminate the removal of excess coding so the 2025 1099R will be correct. If they refuse to do that it will create tax filing problems and also jeopardize the chance to get this money back into the Roth IRA.
In other words, the tax on the conversion cannot be avoided, but at least the client should be able to preserve the Roth funds by completing a rollover.
Permalink Submitted by Carla Campbell on Mon, 2025-03-31 16:34
Alan,
Much appreciate the prompt reply and comments.
So Happy to be an Elite member.
Best,
Carla Campbell CPA CFP