Prior year Roth 401k rollover mistake

Submitted by Johnathan Hanna on Mon, 2021-03-08 03:17

I have a client who in 2017 rolled over their 401k into a traditional IRA account. It was done via a single transfer from the 401k account to the IRA account, both held at the same custodian. The balance at the time of rollover was around $200,000.
Now the client is saying that a portion of the rollover, around 30 percent was Roth and they are wondering what steps need to be taken to correct.

I do not get the sense that the custodian was at fault, so I think talking to the custodian about reforming the $60,000 to a Roth IRA would be a longshot.

At this point, I think the client will need to remove the rollover amount that was allocated to Roth plus earnings. Since an excess contribution to the TIRA was made and not removed timely, the 6% annual excise tax will come into play.

Are there any other potential options to explore? I do not think the self-certification for the 60 day rollover waiver is applicable and I cannot really advise them to leave the Roth portion inside the TIRA since it’s technically an excess contribution and exposed to the 6% annual excise tax.

I would appreciate any thoughts on the matter.



Submitted by David Mertz on Mon, 2021-03-08 04:42

If this was done as a single transfer and done with the same custodian, it sounds more like the entire distribution was from only the traditional account in the 401(k) but about $60,000 of that was after-tax money in the traditional account, was *intended* to have been rolled over to a Roth IRA instead of to a traditional IRA, but for some reason the entire amount was permissibly rolled over to a traditional IRA.  In that case, there is no excess contribution and the after-tax money from the traditional account in the 401(k) simply became basis in nondeductible traditional IRA contributions in the client’s traditional IRAs.  You’ll want to confirm with the client if this was the case with the entire amount reported on a single Form 1099-R with code G or if there were instead two separate distributions, one from the traditional account in the 401(k) (code G on the Form 1099-R) and another from a designated Roth account on the 401(k).

Submitted by Johnathan Hanna on Mon, 2021-03-08 13:10

Thanks for the response. Would this change anything?  I think I read in a similar discussion that in these instances where the pre-tax, Roth, and after-tax assets are commingled in a SDBA, the taxpayer is responsible for allocating the amounts to the correct account buckets when rolling over to an IRA?  I guess it boils down to how the amounts were originally contributed to the employer plan (pre-tax, after-tax, or Roth).  

Submitted by Alan - IRA critic on Tue, 2021-03-09 02:52

Your first post indicated a direct rollover of various 401k components to a TIRA. At that time, Notice 2014-54 had been issued outlining how to order a split direct rollover sending portions of the 401k to different destinations such as different kinds of retirement plans or to the taxpayer. Your last post suggests that these funds instead might have been distributed to a taxable brokerage account instead of being moved by direct rollover?  The 2017 1099R should provide an indication, since Box 7 should show G for direct rollovers from the pre tax or after tax portions of the 401k, or Code H for a direct rollover from the Roth 401k account. 1099R forms are highly accurate, so at this point client would have to provide clear evidence that the 1099R forms issued did not propertly reflect the direct rollovers. Client may also be confused between after tax sub account money v Roth money in the plan, and there is a major difference. If client had after tax non Roth money in the plan a split direct rollover sending the after tax funds to a Roth IRA should have been done, and there would have been no tax due. Further investigation would require a copy of the plan statement for 2017 before the rollovers, the 2017 1099R forms, and the IRA 5498 forms to reconstruct what happened. 

Submitted by Johnathan Hanna on Tue, 2021-03-09 12:07

Sorry for the confusion.  I meant a self-directed 401k account.  So there was a direct transfer between the 401k and IRA.  In this case, I think getting the plan statement is advisable so they can confirm the breakout between pre-tax, after-tax, and Roth before rollover. Along with getting the other forms.I guess the best case is that it was after-tax, so the client gets basis in the IRA, and the worst case would be that part of the balance was Roth because, and would be deemed an excess contribution to the IRA?

Submitted by Alan - IRA critic on Tue, 2021-03-09 13:43

Yes, designated Roth dollars rolled into a TIRA results in the excess contribution excise tax for each year the excess remains in the IRA, then a corrective distribution out of the TIRA and loss of the tax deferred Roth status. The IRA distribution 1099R will also take explanation to prevent it from showing the distribution as taxable in Box 2a, which would amount to double taxation. Definitely the worse case scenario. 

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