Incorrect Roth Rollover

Submitted by Alison Hatch on Thu, 2022-07-21 22:03

When my bank ended it’s investment services in 2020, I rolled my traditional IRA into my traditional 401(k). I also rolled my Roth IRA into my Roth 401(k). I had no idea you can’t do that, and I’m not even sure how I managed it at the time, but now, two years later, the IRS has contacted me and I’ve learned of my mistake. I am now being told I have to pay taxes on the entire amount of the rollover plus fees and penalties. Is there any way for me to correct this mistake? And what happens to the funds that are now in my Roth 401(k) that should never have been deposited?
Thanks



Submitted by Alan - IRA critic on Fri, 2022-07-22 00:10

  • Been doing this for years, and this is the first instance I’ve heard of this transaction actually happening. It is quite possible that in addition to yourself, the receiving or distributing firms  may well have contributed to this error.
  • What was the rollover process used, direct or indirect rollover?  What did your 2020 1099R from the Roth IRA custodian look like?
  • How did the IRS discover this error?
  • Corrective measures include treating the Roth IRA distribution as a taxable distribution in 2020. The amount of the distribution that is taxable is determined by the amount of your regular and conversion contribution basis in the Roth IRA, actually all of your Roth IRAs if you have more than one. If you are under 59.5 there is also a 10% penalty on any taxable gains or the taxable amount of any Roth conversions that had not been held for 5 years. In other words, same taxes as if you did no rollover at all. Then you must tell your Roth 401k plan administrator that the rollover is an excess amount because it was not rollover eligible under the tax code. DId the plan administrator have any documentation that these funds came from a Roth IRA?  Again, how was the rollover handled, and do you still have a copy of any paperwork you completed? The plan will have to distribute the rollover amount back to you, adjusted for any gain or loss while they held the disallowed rollover.
  • There is a chance the Rev Procedure 2020-46 could be used to enable you to complete a very late rollover of these fund back to your Roth IRA. More detail on that later.
  • What was the amount of this rollover?


Submitted by David Mertz on Fri, 2022-07-22 01:29

  • I agree that it seems like the amount distributed from the Roth IRA and moved to the Roth 401(k) might qualify for self-certification that it would qualify for waiver of the 60-day rollover deadline due either reason (c), the distribution was deposited into and remained in an account that the taxpayer thought was an eligible retirement plan (a 401(k) plan is not eligible to receive this rollover), or reason (a), an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates (the only type of rollover other than an In-plan Roth Rollover permitted to be made to a Roth 401(k) is a direct rollover from another designated Roth account in a qualified retirement plan and as a direct rollover the receiving plan should have been aware of the type of account from which the distribution was made and therefore should have disallowed the rollover).
  • My guess is that the IRS flagged the fact that there was no Form 5498 from a Roth IRA (the only type of account permitted to receive a rollover from a Roth IRA) showing receipt of a rollover equal to the amount that a Form 1099-R showed was distributed from the Roth IRA.  Had there been no Form 1099-R, the IRS would not have been the wiser (unless a rollover was reported on the 2020 tax return despite there being no Form 1099-R reporting a distribution).


Submitted by Alison Hatch on Wed, 2022-12-14 10:51

Thank you for the tips.  I did indeed do a self-certification for a delayed rollover.   I did have to contact my employer to request an administratI’ve correction withdrawal from my Roth 401K (NOT another rollover), but I then deposited the funds into a Roth IRA and provided the fininacial institution a self-certification letter.   With the help of a tax lawyer (to cross my t’s and dot my i’s), I provided the IRS a copy of all the paperwork and I just received a letter from them stating that I owe no further taxes for 2020.   Matter resolved.  Thank you again for the help.  



Submitted by Alan - IRA critic on Wed, 2022-12-14 15:50

Thankyou for the update, as this is very useful info. Could you please update this again in late January with respect to whether the employer plan issued a 2022 1099R form or not, and if they did what the codes were on that form?



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