Roth 401k Check deposited incorrectly
We have a client who had a rollover check from their Roth 401k deposited by mistake into their traditional IRA with us. The rollover took place in August of 2018 and they just realized the error this week and reached out to us and asked for a correction. Our clearing firm is willing to do a deposit correction but they will not move the earnings to the Roth only the principle- as the entire amount is not eligible to be in the traditional IRA how should we tell them to handle the earnings?
Permalink Submitted by Alan - IRA critic on Thu, 2019-02-28 23:57
Client is fortunate that any kind of a correction is being offered, as this is one of the nastiest errors to correct, with many firms placing the blame on the client or the other custodian. That said, this error should obviously be corrected with the same kind of earnings calculation done for a recharacterization or excess contribution removal. Technically, since a Roth 401k is not eligible to be rolled to a TIRA, this IS an excess TIRA contribution that is being transferred to a Roth IRA rather than being distributed to the client. They need to be convinced to calculate the gain or loss in the TIRA as a whole since the Roth 401k was deposited. Was this a distribution check or a direct rollover check – 1099R code would have been H if a direct rollover check was issued, but such a check should have been made payable to a ROTH IRA FBO client. It is wasn’t, then the 401k administrator is responsible for the error. Finally, you could state that every other form of excess contribution is accompanied by allocated earnings, since those earnings would have been generated in the Roth IRA if the deposit had been done to the correct account.