Vanguard Rollover IRA Error

Submitted by Laura Hall on Fri, 2022-10-28 16:34

In 2022 I rolled over my existing IRA accounts into Vanguard IRA accounts to consolidate my retirement accounts. There is an issue with my Fidelty Traditional IRA rollover. It was incorrectly rolled over into my Roth IRA account. This transfer took place in April of 2022.

It was NOT my intention for the Traditional IRA funds to end up in the Roth IRA account and there is a large tax implication (I am only 32 years of age). Although I had made my intentions clear by calling on a recorded line and receiving written directions from Vanguard, no one from Vanguard contacted me prior to depositing the check and they have not been helpful in assisting with a solution. I have submitted previous claims to Vanguard to have this corrected, all which have been denied. They are saying this is an irreversible problem that cannot be fixed.

Also, after consulting with my tax advisor, I am planning to my file my 2022 tax return under the following code in agreement with the Tax Code 1099 R I received from Fidelty: IRS Code G (Code G: Direct rollover of a distribution from and to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA).

Do you know what my options are? Have you dealt with vanguard on a similar issue? Can I recharacterize the Roth IRA if I do so before year end?

Any assistance you can provide would be greatly appreciated. Thank you!

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Permalink Submitted by David Mertz on Fri, 2022-10-28 17:11

You said that the accounts being moved from Fidelity were IRA accounts, not accounts in qualified retirement plans like a 401(k), so code G would not apply. Have you actually already received a 2022 Form 1099-R from Fidelity with code G? (It seems unusual that Fidelity would have already issued a 2022 Form 1099-R.)
Recharacterization is not an option. It’s not permitted.
Exactly where was the error made? Does Fidelity believe that this was a non-reportable trustee-to-trustee transfer from one traditional IRA to another? If not what will Fidelity be reporting on their Form 1099-R.
Does Vanguard believe that this was a non-reportable trustee-to-trustee transfer of a Fidelity Roth IRA? If not, what will Vanguard be reporting on the Form 5498 for the Roth IRA (rollover contribution or conversion contribution).
If all of your interaction was with Vanguard, it seems that it was Vanguard that made the error and needs to correct the error unless you signed some form that indicated that this was to be something other than a trustee-to-trustee transfer of a traditional IRA and you failed to catch the error. It seems that Fidelity would have identified on the funds transfer the Vanguard account number that was intended to receive the transfer and, if so, Vanguard could have given Fidelity the wrong receiving account number or Fidelity could have transcribed it incorrectly.
At your age, you might actually benefit in the long run by making it a Roth conversion and paying the taxes now to allow subsequent investment gains to be tax-free (once you reach age 59½) instead of tax-deferred. It depends somewhat on the marginal tax rate that you would pay on the Roth conversion.

Permalink Submitted by Laura Hall on Sun, 2022-10-30 15:55

1.) I misspoke. The funds from Fidelity were from an employee sponsored 401k Roth plan. I have not received a Form 1099-R from Fidelity yet, however I can go online and see that they plan to send me one with the code G at year end. 2.) My tax advisor found this article: Recharacterization of IRA Contributions to Correct Mistakes (myfederalretirement.com) Sounds like I can correct contributions? I am not trying a re-characterization. Note we are asking for a re-characterization of a contribution that was mistakenly handled. 3.) Fidelty is not aware of the error. They will be using Code G on the 1099-R Form. 4.) Vanguard is aware of the error. The check was properly made out to payee title, “Vanguard TR IRA.” However, I wrote my Vanguard Roth IRA account number on the check because I was allso rolling over another check to my Vnaguard Roth IRA account and I misunderstood the directions that were provided by Vanguard, and I believed that was the correct account number. Although I made my intentions clear by calling on a recorded line and receiving written directions from Vanguard, no one from Vanguard contacted me prior to depositing the check. 5.) We are in the 24% tax bracket and so it would be a pretty large sum of money to pay. Trying to avoid that, but yes I understood that eventually I will have to pay the tax man in some way/shape/form. Thanks for your help.

Permalink Submitted by Alan - IRA critic on Sun, 2022-10-30 17:08

With respect to your Roth 401k balance, any direct rollover can only be made to a Roth IRA, and the 1099R for such a direct rollover must be coded H, not G. This rollover would not be taxable, but you need to update your Roth IRA basis to reflect the rollover. If these funds end up in a TIRA in error, it would make the distribution taxable and create an excess TIRA contribution, which must be removed. While you might be able to correct this type of error through the self certification process per IRS Rev Procedure 2020-46, that would require cooperation of your IRA custodians. Recharacterization cannot be used to correct this error because this was a rollover. Are you sure that there was not a pre tax 401k balance rolled over as well? Usually, there is a pre tax 401k balance in the 401k, which would be coded G in a direct rollover. Such pre tax funds could come from elective deferrals or company matching. All matching of Roth 401k contributions are pre tax, not Roth. It seems unlikely that Fidelity would botch both the 1099R coding as well as the check payee. Please clarify further.

Permalink Submitted by Laura Hall on Sun, 2022-10-30 19:53

I just put together the below letter to Vanguard customer care department, apologies for the confusion. I am trying to make sense of it all and the letter describes exactly the scenario. Sorry if I mislead you. I did have some attachments to the letter as well, which I cannot upload but I think this paints the picture. Letter Below (with $ amounts simplified)To Whom It May Concern: In 2022 I rolled over my (2) existing Fidelity 401K account into (2) Vanguard IRA accounts to consolidate my retirement accounts. There is an issue with my Fidelity Traditional IRA rollover. It was incorrectly rolled over into my Roth IRA account. This transfer took place in April of 2022. Please note the payee titles on the checks. I received two checks from Fidelity (attached):

Check #1 made out to “VANGUARD TR ROTH IRA” in the amount of $7k
Check #2 made out to “VANGUARD TR IRA” in the amount of $60k

Both checks were rolled into my Vanguard Roth IRA account (Acct #XXX1). The $60k was incorrectly placed in this account and should have gone into my Vanguard Traditional IRA account (Acct #XXX2). I wrote Vanguard Acct #XXX1 on both checks because I misunderstood the directions that were provided by Vanguard, and I believed that was the correct account number for both checks. It was NOT my intention for the $60k Traditional IRA funds to end up in the Roth IRA account and there is a large tax implication. Although I had made my intentions clear by calling on a recorded line and receiving written directions from Vanguard, no one from Vanguard contacted me prior to depositing the check. After consulting with my tax advisor CPA, I am going to my file my tax return under the following codes:

Check #1 made out to “VANGUARD TR ROTH IRA” in the amount of $7k

To be coded under IRS Code H (Code H: Direct rollover of a designated Roth account distribution to a Roth IRA.)

Check #2 made out to “VANGUARD TR IRA” in the amount of $60k

To be coded under IRS Code G (Code G: Direct rollover of a distribution from and to a qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA) See attached from Fidelity in agreement with the above. I am enclosing documentation that you can correct contributions. I am not trying a re-characterization. Note we are asking for a re-characterization of a contribution that was mistakenly handled. I have submitted previous claims to Vanguard to have this corrected. I have tried to speak to an individual in the customer care department but have been blocked by lower-level customer service reps and have not spoken to anyone in management. I feel this could have been handled better from Vanguard and need assistance in fixing this error before year end. I feel I have been a valued customer and look forward to continuing to work towards a solution. Let me know if there are any additional questions regarding the scenario.

Permalink Submitted by David Carrell on Fri, 2022-10-28 21:10

I had a vaguely similar thing happen though not “as bad”. Mine was going from Vanguard to a different custodian (ML). It was also from a 401K to a TIRA, not IRA to IRA. In my case it wound up in the wrong TIRA (I have two with ML). So I really did not have the tax implications you had but it did have some minor implications for me.
It was no real issue getting it fixed by ML and Vanguard was helpful in doing so. In my case the issue was all on the ML side. But again, they were very responsive in resolving it.
I believe if you give Vanguard a chance, and especially if you can get past first level contact and speak to a 2nd level or specialist, they will be helpful. This does presume that the issue is exactly as described. I also suspect that were Fidelity at fault, they would be helpful as well. But regardless you need to speak to a person (this could take a while via email) and are able to “escalate” this past the frontline agent.
Take a breath and give it a little time.

Permalink Submitted by David Mertz on Mon, 2022-10-31 01:40

The code-G Form 1099-R is for the rollover of your traditional account in the 401(k), not the Roth 401(k) account, and would have a zero in box 2a. The rollover of the Roth 401(k) account will be reported on a separate code-H Form 1099-R as Alan said.
What you’ve described is a combination of errors, one where you wrote the wrong account number on the back of the check, effectively requesting that Vanguard deposit it into the Roth account, but also and error by Vanguard in that they did not reject that request due to the check being made out specifically to a traditional IRA.
[Edit: Vanguard agreeing to treat it as a regular contribution is doubtful since the amount is well over the maximum permissible regular contribution for the year.] Because they deposited the traditional funds into an account other than the type specified on the check, if they won’t correct this as a bookkeeping error you might be able to convince them to re-code the deposit as a regular contribution instead of as a rollover contribution. This would allow you to request a return of that contribution (with the amount distributed being adjusted for gain or loss) and then complete an indirect rollover of the gross amount originally distributed from the traditional 401(k), invoking Rev Proc 2020-46 if more than 60 days have passed. The potential pitfall of this approach is that the IRS might see this as a step-transaction performed as an end-around of the prohibition on recharacterization, but that seems doubtful since the net result is not exactly the same due to the net gain or loss not being moved to the traditional IRA.
Regarding reporting it as a Roth conversion and leaving the funds where they are, while the tax liability on a $60k taxable rollover may be undesirable in the short-term, reporting it as a taxable rollover to a Roth IRA may be advantageous in the long term, particularly since tax rates are schedule to return to previous, higher levels in 2026. There’s a good chance that converting 60$k now will have been done at a lower marginal tax rate than if done in the future. Of course this only works if you have other funds available to pay the tax now.

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