401K rollover to Roth IRA – how to undo?
I had a $130,000 in 401k balance with my former employer that I decided to transfer to Vanguard Roth IRA, doing mid-air conversion, few weeks ago. I now have decided that was not a smart move, as the tax implications are going to be painful. I’d prefer to have it in traditional IRA and defer taxes that way.
Vanguard refuses to recharacterize it as traditional IRA, since the transaction went as mid-air conversion.
What are my options now?
Permalink Submitted by Alan - IRA critic on Sat, 2019-04-20 00:58
A conversion done after 12/31/2017 cannot be recharacterized regardless of how the conversion was done. While your transaction is technically called a “qualified rollover contribution” to a Roth IRA, it is treated in all respects as a conversion, the only thing different being that the source of funding was not an IRA account. While you will owe a large tax bill for this rollover since it cannot be reversed, in the long run some portion of the conversion or perhaps with some luck even the entire conversion might turn out to be beneficial. At least the tax brackets are probably lower now than they will be down the road, and your RMDs will be considerably less than if you had not converted. Further, your converted amount of 130k is probably already worth more than that. When the TCJA tax bill was passed at the end of 2017, many warnings were published about the end of recharacterizations for qualified rollovers or conversions. Your plan administrator may or may not have warned you about the recharacterization change, but they were not required to.