IRA Recharacterization question

Hi,

I had a 401(K) account with one of my previous employers that had both traditional and Roth 401(K) contributions in it. After I quit that organization, I rolled over the 401(K) account entirely into a Rollover IRA (Traditional) account in May 2021. I think it is a mistake – I should have rolled over the traditional 401(K) into a rollover IRA and the Roth 401(k) in a Roth IRA. Not entirely sure – please correct me if I’m wrong.

Now given this situation, I understand that I had until October 15th of 2021 to do a recharacterization which I missed (Learnt about it just a week back). Now we are in 2025 and I’m wondering if there is any solution available to fix this issue. Really appreciate any help here. Thanks in advance.

 

Regards,

Arun Ramasamy



Unfortunately, at this late date there is no way to reconstruct the rollover as it should have been done. Hopefully, the Roth 401k balance was low. But you are left with an incorrect 2021 1040 and a multi year excess contribution to your TIRA, which should be removed.

Because a Roth 401k balance is not eligible to be rolled to a non Roth IRA, the Roth 401k balance was a partially taxable distribution (only the earnings taxable) in 2021, but the statute of limitations for 2021 returns ends on 4/15/2025 after which the IRS cannot recover whatever tax would have been due.

But the botched rollover also created an excess TIRA contribution for 2021, for which there is no statute of limitations and an annual 6% excise tax would be due for 2021 and each year thereafter on Form 5329. However the 5329 will reduce the excess for any IRA distributions you took after 2021 or will also reduce the excess by applying it to any IRA contribution space that you did not use after 2021. If either of these situations reduces the excess, you will not owe the 6% excise tax for years in which or after which the excess is eliminated.

If neither of the above reduces the excess, you can just request a distribution of the excess amount (no earnings calculation) per Sec 408(d)(5). The excess amount will be distributed, but because you never claimed a deduction for the excess contribution, the removal should not be taxable. However, after removal there is no way to get those funds into the Roth IRA, where they should have gone.

Note that the recharacterization process does not apply to rollover errors.

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