TSP Rollover to Wrong Account
Dear Ed Slott Team:
I have a client who completed his TSP rollover paperwork incorrectly in Nov, 2021. He had both a Roth portion and a Traditional portion in his TSP, and when he completed the paperwork, he requested that the entire TSP (both Roth and Traditional portions) be transferred to his IRA at TD Ameritrade. The transfer happened via EFT and both amounts, the Roth portion and the Traditional portion, went into his IRA. Both amounts have remained in his IRA in all cash.
In speaking with TD Ameritrade, they have requested that the client do the following to correct the situation:
1. Complete an IRA Distribution/Withdrawal Form to remove the excess amount from his IRA and transfer it to his Roth, and
2. Provide a Letter of Indemnity outlining that he made a mistake and did not provide the correct account numbers.
I would greatly appreciate it if you could provide some advice on this matter:
1. In particular, how can this situation be correct with no tax consequences, and
2. Is the approach the TD Ameritrade recommending the approach you would advise?
Thank you for your expertise,
Permalink Submitted by Alan - IRA critic on Wed, 2021-12-01 16:03
Yes, this solution is the correct one, and client is fortunate that TDA will cooperate and understands the situation. Many IRA custodians do not. The Roth portion of the 401k is not eligible for rollover to a TIRA, and therefore becomes an excess TIRA contribution which must be removed as such with applicable earnings. The earnings will be taxable and subject to penalty if under 59.5.
The amount of the Roth 401k distribution can then be rolled into the Roth IRA if done within 60 days of the 401k distribution receipt date. TDA should code the Roth contribution as a rollover contribution. If the 1099R from the 401k plan shows a taxable amount in Box 2a, the client will have to request a corrected 1099R or provide a complete explanation if the return differs from the plan 1099R. Client should also carefully check the IRA 5498 forms issued next year for accuracy. The excess removal 1099R showing any earnings distributed will be reported on the 2021 return. The amount of earnings should be very small.
Client needs to get on this ASAP to make sure the full correction plan is completed within 60 days from the receipt (EFT date) of the 401k distribution.
Permalink Submitted by James Runey on Wed, 2021-12-01 16:50
Alan:Thank you very much for this fantastic explanation. I really appreciate it.