401K with both Pretax and Roth money

Submitted by Kevin O'Hearn on Tue, 2022-12-06 14:32

Hello,

I have a client who had a 401k with both pretax money and Roth money in it. They retired and rolled both balances over. They intended to roll the pretax portion to a Traditional IRA, but in error rolled it to a Roth IRA, thus making it a taxable rollover. Is the following allowable to correct this error?

1. Treat the pretax rollover amount to the Roth as an excess contribution.

2. Remove the pretax portion as a return of excess.

3. Deposit this portion to the Traditional IRA, representing an indirect rollover from the original 401k plan (assuming still within 60 days since 401k distribution).

OR….must they leave the amount in the Roth and recognize the taxes?

Thanks!



Submitted by Alan - IRA critic on Tue, 2022-12-06 16:28

  1. No. It’s not an excess contribution and constitutes a qualified rollover contribution (aka conversion) which can no longer be recharacterized. Conversely, if the Roth portion had been rolled to a TIRA, that would be a disallowed rollover and an excess TIRA contribution.
  2. If this occurred due to custodian error (either custodian), client can request that they correct it. This usually only works if one of the custodians is totally at fault, typically the receiving custodian. If client completed paperwork incorrectly they will be out of luck.
  3. If the amount is small and does not spike client’s 2022 marginal rate, this may work out to be beneficial in the long run, but of course not in 2022.

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