Roth 401K to Traditional IRA and COVID repayments

Submitted by CT on Fri, 2023-09-08 21:29

I have a friend who lost her job in 2020. She took a COVID distribution, which she is fishing up repaying, as well as made an indirect rollover for her Roth 401K. The indirect rollover was incorrect. She rolled the Roth 401K money to her Traditional IRA. Further, about 2/3rds was part of the covid distribution. Well in 2022, last year of the covid repayments, she contacted the custodian and thought she fixed the issue by having them move the Roth 401K money into a Roth IRA and the custodian coding it on the back end as it originally going to a Roth IRA. However, this generated a 1099 R as a Roth Conversion for 2022. She again contacted them earlier in the year and thought we had this all wrapped up explaining the situation, but we are still having issues, and it seems like not many people understand all the tax considerations at the custodian. Any advice on how to rectify this issue would be helpful. She’s on extension, fyi.

Doing some research, it looks like the Roth 401K is not eligible to roll into a Traditional IRA in the first place, and this will result in an excess contribution. If anyone has dealt with this before or has any guidance on the best path forward, it would be greatly appreciated. Also, does the COVID distribution and repayment factor into this at all?

Thanks!



Submitted by Alan - IRA critic on Fri, 2023-09-08 22:52

  • The Covid repayment is a separate issue from the botched rollover. When was this rollover done, and what is in Box 7 of the 1099R issued by the employer plan?
  • You are correct that Roth 401k funds are ineligible to be rolled into a TIRA account. And the IRA custodian will not be willing to reconstruct the botched rollover unless they were totally at fault. That’s probably not likely. The excess contribution to the TIRA is the least of the problems compared to loss of Roth funds, and a taxable distribution from the Roth 401k if there were NQ earnings in the account. 
  • The TIRA custodian will probably not reconstruct the rollover, but they must cooperate to remove the excess contribution to the TIRA. This should be done ASAP if there is no chance to reconstruct the rollover. After that, there may be a possibility to use Rev Proc 2020-46 to allow a late rollover of the funds to the Roth IRA, but action should have been taken long before this, right after the error was first discovered. What was the rollover amount here?
  • I don’t want to get into the Covid repayment until this first issue is fully addressed.

Submitted by CT on Mon, 2023-09-11 19:10

  • The Covid repayment is a separate issue from the botched rollover. When was this rollover done, and what is in Box 7 of the 1099R issued by the employer plan?
  • ANSWER: Rollover done in 2020. 2020 1099R Box 7 is code  1 for Trad 401k. And code B1 for Roth 401K.
  • You are correct that Roth 401k funds are ineligible to be rolled into a TIRA account. And the IRA custodian will not be willing to reconstruct the botched rollover unless they were totally at fault. That’s probably not likely. The excess contribution to the TIRA is the least of the problems compared to loss of Roth funds, and a taxable distribution from the Roth 401k if there were NQ earnings in the account. 
  • ANSWER: Agreed. Also, this rollover was part of the COVID repayment. So would the rollover need to be coded as repayment? Because right now it’s not. I’m guessing yes, but was rolled in the 60 day period and I believe coded an Indirect rollover. At the time, the custodian’s paperwork didn’t have the option for a COVID repayment. But I guess it doesn’t matter since it is an an excess contribution regardless since the Roth should never have been in the trad IRA.
  • The TIRA custodian will probably not reconstruct the rollover, but they must cooperate to remove the excess contribution to the TIRA. This should be done ASAP if there is no chance to reconstruct the rollover. After that, there may be a possibility to use Rev Proc 2020-46 to allow a late rollover of the funds to the Roth IRA, but action should have been taken long before this, right after the error was first discovered. What was the rollover amount here?
  • ANSWER: Rollover amount is about $56K. When they take out the excess and generate a 1099r. Would box 2a (taxable amount) only have the earnings? Or is the full amount taxable, since it’s past the deadline plus extension (2020). I know there will be two years of excise taxes that will need to be paid.
  • I don’t want to get into the Covid repayment until this first issue is fully addressed.
  • ANSWER: This is all in one. The rollover was part of the COVID repayment.

Submitted by CT on Mon, 2023-09-11 19:10

  • The Covid repayment is a separate issue from the botched rollover. When was this rollover done, and what is in Box 7 of the 1099R issued by the employer plan?
  • ANSWER: Rollover done in 2020. 2020 1099R Box 7 is code  1 for Trad 401k. And code B1 for Roth 401K.
  • You are correct that Roth 401k funds are ineligible to be rolled into a TIRA account. And the IRA custodian will not be willing to reconstruct the botched rollover unless they were totally at fault. That’s probably not likely. The excess contribution to the TIRA is the least of the problems compared to loss of Roth funds, and a taxable distribution from the Roth 401k if there were NQ earnings in the account. 
  • ANSWER: Agreed. Also, this rollover was part of the COVID repayment. So would the rollover need to be coded as repayment? Because right now it’s not. I’m guessing yes, but was rolled in the 60 day period and I believe coded an Indirect rollover. At the time, the custodian’s paperwork didn’t have the option for a COVID repayment. But I guess it doesn’t matter since it is an an excess contribution regardless since the Roth should never have been in the trad IRA.
  • The TIRA custodian will probably not reconstruct the rollover, but they must cooperate to remove the excess contribution to the TIRA. This should be done ASAP if there is no chance to reconstruct the rollover. After that, there may be a possibility to use Rev Proc 2020-46 to allow a late rollover of the funds to the Roth IRA, but action should have been taken long before this, right after the error was first discovered. What was the rollover amount here?
  • ANSWER: Rollover amount is about $56K. When they take out the excess and generate a 1099r. Would box 2a (taxable amount) only have the earnings? Or is the full amount taxable, since it’s past the deadline plus extension (2020). I know there will be two years of excise taxes that will need to be paid.
  • I don’t want to get into the Covid repayment until this first issue is fully addressed.
  • ANSWER: This is all in one. The rollover was part of the COVID repayment.

Submitted by Alan - IRA critic on Mon, 2023-09-11 20:25

  • OK, I understand that these problems are interrelated. Since the excess contribution to the TIRA was done in 2020, the corrective distribution will occur well after the due date per Sec 408(d)(5) as an excess regular TIRA contribution, and therefore there is no earnings calc done, just the exact amount of the botched rollover must be distributed, and 6% excise taxes will be due for 2020-2022 on respective 5329 forms. It is critical that the TIRA custodian understand that under 408(d)(5), box 2a of the 1099R must be blank and the “taxable amount not determined” box checked in 2b. This will prevent taxation of this corrective distribution, but it also means that the CRD remains distributed but can still be repaid if the TP is still within 3 years of the CRD. The 8915 E filed for 2020 will be incorrect since the CRD was not effectively repaid in 2020 (the TIRA is not an eligible retirement plan for repaying a Roth 401k CRD). But if still within 3 years, it can still be repaid to Roth IRA account, and reported on the 2023 8915 version. 
  • Rev Proc 2020-46 will not be needed to extend the 60 day rollover period (If that was even doable) since a CRD can be rolled over within 3 years. Is TP still within that 3 year period? If so, and the CRD repayment is done now, be sure that the custodian is informed of the repayment so their 5498 will so indicate. If not, the 8915 will not match up to the 5498. 
  • On the 2020 8915 E as amended, TP can change their decision whether to report all the CRD taxes in 2020 or over 3 years. Of course, the Roth 401k distribution will probably have a modest taxable %. This will effect any tax due for 2021 and 2022 as well or refunds if the CRDs are fully repaid. 

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