Accidental mid-air conversion
Hi I have a situation where I accidentally rolled over my traditional 401k money into a roth IRA (about 45k)
I called vanguard and they gave me only two options, to take a distribution from the RothIRA and put the money into the traditional IRA or leave the money in the roth IRA as mid-air rollover. They were not willing to “fix the error” by just transferring the money.
I am still in the 60-day grace period that IRS gives and I realized that this mistake happened 2-3 weeks after the rollover was done.
I have really 2 options:
1. Leave the money into the account as a mid-air conversion. This will push me however to a higher income bracket from 23 to 32% and I will have to pay an extra 9% taxes to my whole salary of the year. The difference is about 30k in extra taxes that I would have to pay. The rollover amount was around 45k…
2. I take an “early contribution” from my vanguard roth IRA and put the money into my pre-tax IRA. IFF the 60-day grace period is honored, I will not have to pay anything. If it is NOT I will have to pay 10% penalties (4.5k) on top of the extra taxes due to the early distribution.
If I knew for a fact that IRS will honor the 60-day grace period then the answer is a no brainer. If not I will have to bite the bullet and pay the extra taxes. How can we answer this question with certainty? Is there a tax pro out there that would know what to do?
Permalink Submitted by Alan - IRA critic on Wed, 2024-04-03 17:54
I don’t think you calculated the additional tax from the Roth rollover correctly. If 30k that would be 67% of the Roth rollover, and it is not likely to be that much even if your additional income triggered other taxes (such as NIIT) in addition to the 32% marginal rate.
This will not work at all because you cannot ignore the rollover already done and roll a Roth distribution into a TIRA, which is not eligible to receive a rollover from a Roth IRA. Of course, prior to 2018 you could have recharacterized the Roth rollover (aka conversion) to a TIRA and the problem would have been eliminated, but you can no longer recharacterize a conversion.
If you take a Roth distribution of 45k, it will not be taxable if you have a balance of regular Roth contributions of that amount, but if you have to tap the Roth rollover, you will owe a 10% penalty for not having held the rollover for 5 years (unless you are over 59.5). And since you cannot roll this money into your TIRA, there is no reason to even consider withdrawing from the Roth IRA unless you need to in order to pay taxes on the ill fated rollover.
NOTE: If the first distribution came from a qualified plan, these plans could avoid these problems if they made the check payable FBO your TIRA or Roth IRA. That would avoid these “mid air” catastrophies unless the IRA custodian made the error, and if they clearly made the error they would have to fix it. This would also make sure that the 1099R issued by the plan accurately reflects the type of receiving account. In your situation the 1099R will probably show no taxable income because the plan thought it was going to a TIRA, but since the funds went to the Roth, you will owe the taxes and have to explain why to the IRS. VG will issue a 5498 clearly stating that the funds were contributed to the Roth IRA.