Erroneous 401k Rollover

Submitted by Angelique Lund on Fri, 2022-11-11 17:58

New client recently discovered that in 2020 a rollover from Wife’s IRA was erroneously deposited into his IRA. From the sounds of it the client accidentally listed his own IRA account for the deposit and the Custodian did not catch the SSN and/or name mismatch on the paperwork. Custodian claims there is nothing they can do on their end to correct this error. Wanted to reach out to see if anyone had experienced a similar situation in the past and/or could help point to guidance on the following questions:

1. We are planning to advise that the “excess contribution” to his IRA needs to be removed ASAP and that 2020 and 2021 returns should be amended to report the excess contribution and pay the 6% excise tax as well as ensuring he pays such tax with his 2022 (and future years until he get the excess removed). Is there any process to avoid the 6% excise tax in this situation?

2. Once the excess contribution is removed is it possible to be able to deposit it into her IRA where it should have been deposited in the first place?

3. Assuming there is even the ability to deposit the excess contribution into her IRA is it possible to deposit the earnings on the excess contribution to her IRA as well?

Overall seems like a very messy situation that we will be trying to help the client navigate through. Appreciate any guidance or prior experience the members of this group may have!



Submitted by Alan - IRA critic on Fri, 2022-11-11 23:50

  • With respect to the excise taxes, Form 5329 for each excess year reports the tax and provides 2 automatic options for dealing with the excess (distribution or absorption). With distribution, any distribution he took after 2020 would reduce the excess, or if no distribution but he was eligible for a contribution that was not made, the contribution space would absorb the excess. Sounds complex, but just follow the 5329 form to determine if the excess is still in his IRA or not.  If the excess is still in his IRA, he needs to withdraw it (no earnings adjustment applies) before year end and that will avoid a 2022 excise tax. 
  • If the excess is large enough to warrant the extra work, he might check into self certification per RP 2020-46 to determine if the 60 day rollover deadline can be extended in order to deposit the funds to her IRA. The IRA custodian would have to cooperate with this process. If they do, and accept the late rollover per the sumitted self certification form, the 2020 return will not need to be amended to report a taxable distribution. I assume that return reported this as a rollover, which is incorrect unless this self certification process is able to be executed. Otherwise, the distribution cannot be returned to her IRA or reported as a rollover as it apparently was on the 2020 return.
  • No. Strangely enough, any earnings generated while this excess sat in his IRA will remain in his IRA. This is a trade off for owing the excise tax. Note that even if his 5329 forms allow for the excess to be cured without removal, the self certification procedure is independent of that.
  • Microsoft Word – rp-20-46.docx (benefitslink.com)        Reason (c) would apply.

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