Mistakenly transferred both Roth and pretax funds from 401k to Rollover IRA account

Submitted by Dhirendra Simanshu on Sun, 2021-09-19 10:59

Hello,

I need your suggestions for resolving an issue that happened recently during the rollover of my old 401k accounts from Vanguard and TIAA-CREF to a newly opened rollover IRA account at TD Ameritrade.

My old 401k accounts at Vanguard and TIAA-CREF had both pre-tax and Roth funds. I rolled over both pretax and Roth funds from both accounts to rollover IRA account at TD Ameritrade (TDA). Pretax and Roth funds (from both accounts) were transferred separately to TDA. I later realized that I was not supposed to transfer both Roth and pretax funds to the same rollover IRA account at TDA. I then opened a new Roth IRA account at TDA and requested them to transfer Roth funds to the new Roth IRA account. I also provided TD Ameritrade letters from Vanguard and TIAA CREF stating what amount was pretax and Roth.

The problem is TD Ameritrade IRA team also wants a letter of indemnity (taking all financial liability for this rollover) from Vanguard and TIAA CREF before they can make the change. Unfortunately, Vanguard and TIAA CREF can not provide letters of indemnity. They are willing to give all the details related to pretax and Roth funds again. I have provided TDA a letter of indemnity, but that is not sufficient for them.

I do not know what I should do to convince TD Ameritrade to transfer my Roth funds (that came from my 401k) from the rollover IRA account to a Roth IRA account. Any suggestions would be very helpful. I do not want to pay taxes again on my Roth funds as and when I withdraw them. If TDA does not help, what can I do during the tax filling next year to get the taxes I already paid for my Roth funds.

Sorry for such a long email. I would appreciate your guidance in resolving this issue.



Submitted by Alan - IRA critic on Mon, 2021-09-20 03:33

Such an error is difficult to get corrected, but if one of the custodians is responsible for the error you will have more leverage over the cooperation of that custodian. However, it seems unlikely that the 401k administrators both made the same error, so it appears that the error was made by TDA or you. A direct rollover check from a Roth 401k plan should be made payable to “TDA FBO (you) Roth IRA” which should prevent that check from being deposited into a non Roth IRA. Can you explain how this rollover went off the rails?
Obviously, the best solution would be to convince TDA to reconstruct the direct rollovers according to the documentation you are able to provide. If they refuse, what happens is the Roth 401k money is treated as an excess regular TIRA contribution that must be returned with allocated earnings because a TIRA is not eligible to receive Roth funds as rollovers. Since you will not be taking a deduction for the TIRA contribution, only the earnings will be subject to tax and penalty. While you would avoid double taxation, you would also lose the benefit of having these funds in your Roth IRA. Instead they would reside in a taxable account after the return of the excess contribution (disallowed rollover). 
Also, you need to be sure to elevate your problem to the specialist or supervisory level at TDA, someone who knows what documentation should be accepted to reconstruct the rollover. Again, you will have more leverage if TDA was responsible for the error. Sometimes being partially responsible is not enough, they might have to be 100% responsible.

Submitted by brcwm on Mon, 2021-09-20 19:11

Back in the day there was (inadvertatly) the same thing happen to our group.  Everyone (custodians, tax advisors) agreed that it would be treated as a basis contribution into the IRA and reported on the 8606 moving forward. Kind of seems the way after-tax contribuitons will be treated with the new proposal by the Ways & Means committee. 

Submitted by Alan - IRA critic on Tue, 2021-09-21 00:18

After tax non Roth money rolled to a TIRA just adds basis to the TIRA and Form 8606 must be filed to report that basis. However, funds that are already in a Roth account such as a Roth 401k or Roth IRA are not eligible for rollover to a TIRA at all, and therefore such a rollover creates an excess contribution subject to an annual 6% excise tax. Therefore, such an ineligible rollover must be removed from the TIRA.

Submitted by brcwm on Mon, 2022-01-03 22:04

Bob Keebler posted on Linkedin the following PLR that I beleive makes the above problem reversable.  Would like to hear what you think?
PDF of PLR: https://lnkd.in/dvpUhNzP 
Audio Snippet of Bob Keeber: https://lnkd.in/dey3MUch 
LinkedIn Post: https://www.linkedin.com/posts/robertkeebler_lisi-60-second-planner-plr-202147015waiver-activity-6879452539603963904-xFLE
 

Submitted by Alan - IRA critic on Tue, 2022-01-04 00:13

If the custodians were responsible for such an error, the taxpayer is better served to convince them to reconstruct the rollovers to eliminate the error, and not issue any complicating 1099R or 5498. But that is sometimes not feasible and custodians often do not act unless they are 100% negligent. Rev Proc 2003-16 provided a way to apply for a PLR to request a waiver of the 60 day rollover deadline, but PLRs are very expensive and time consuming. To eliminate this hassle the IRS issued Rev Proc 2016-47 which provided a self certification process under which a cooperating custodian could accept the self certification form from the taxpayer for certain specified reasons to extend the 60 day deadline and accept the rollover into the correct account. This procedure was updated last year by Rev Proc 2020-46 for which a link is provided at the end of this response.
Note that two acceptable reasons to justify the extension are 1) error by financial institution and 2) taxpayer rolled a distribution into an account that they thought (but wasn’t) an eligible retirement plan. The second option could be used if the error was created more by the taxpayer than the custodian (such as providing an incorrect account number). Accordingly, Plan B should have been to utilize the self certification process and only resort to the expensive and uncertain PLR solution if the self certification failed for some reason. In short, in many cases the self certification procedure made 2003-16 obsolete. 
Therefore, a taxpayer whose Roth money ends up in a TIRA must treat the rollover as an excess IRA contribution and have it removed with any earnings by the custodian. But by the time this error is noticed 60 days have often passed. When the taxpayer receives the excess contribution funds after 60 days they should pursue self certification ASAP in order to restore the funds to the correct (Roth) IRA. That would resolve the error with the main issue being a complicated tax return to explain why the taxpayer was not reporting in concert to the 1099R and 5498 forms that the custodians will issue. That’s why convincing the custodian to reconstruct would normally be Plan A, self certication Plan B, and a PLR only a last resort if all else fails and the amount in question warrants spending 20k on a PLR.
Microsoft Word – rp-20-46.docx (benefitslink.com)

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