Accidental IRA conversion – any recourse or suggestions?

Submitted by Sean Flaherty on Tue, 2022-09-06 22:12

Hello,

My wife recently attempted to roll over a pre-tax IRA account from a previous employer’s 403(b) to her personal Vanguard IRA rollover account. Unfortunately, filling out the paperwork, she inadvertently put in the account number for her Vanguard Roth account which resulted in a Roth conversion. Given that it was $300k, I think we are looking at an additional 100k in taxes this year.

There has been a lot of phone calls to try to get it corrected but with no luck.

I’m not a tax expert, so I’m looking for any advice or suggestions. Is there anything that can be done at this point? Any tips on reducing the tax burden or spreading it out? Should we pay the taxes with the Roth money (we are not 59.5 yet so I think there would be an additional 10% hit) or bite the bullet and pull it out of savings. Is there any bright side to this mess?

I’m sick to my stomach and trying to keep things calm around the home, any help or advice is appreciated.

Kind regards,
Sean



Submitted by Alan - IRA critic on Tue, 2022-09-06 22:48

  • Very sorry to hear of this painful error. There is no legal pathway to undo this, since Roth rollovers have not been allowed to be recharacterized since 2018. You are correct that without a non 59.5 penalty exception being available, taking Roth distributions that would tap this rollover would incur a 10% penalty. If she has a Roth regular contribution balance, those dollars come out first without tax or penalty. 
  • Otherwise, damage  control options are limited. If either of you are doing workplace Roth contributions, stop those immediately and change over to pre tax contributions to reduce taxable income. If you can itemize deductions you might accelerate any deductions into this year to add to your deductions. 
  • I’ll assume this error was not materially caused by either the 403b website or the handling by the Roth custodian. Even if it was, for example no warning posted about taxation of rollovers to Roth, that and similar issues would not be nearly enough. Your wife would have had to be almost 100% blameless for either custodian to accept any responsibility. 
  • Small comfort now, but a years down the road when RMDs start, this error might not look so bad as it will shield you from possible future tax rate increases. And when the surviving spouse has to file as single and therefore incurs even higher tax rates, this conversion will probably be viewed more favorably.
  • Sorry that no better solutions are available. I have heard of a couple other identical errors being made, and they all occurred by doing a large transaction on line. For anyone reading this, be very careful about account numbers and boxes checked on any distribution papers or website transactions. 


Add new comment

Log in or register to post comments