Roth IRA 60-day Rollover
I have a client who took money from his Roth IRA and then wanted to put it back using the 60-day Rollover rule. The issue he is facing is the money was wired into his Trad. IRA and now the custodian is doing the recharacterization. Is that legit and will that cause any tax issues for him.
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-28 11:36
If the error was caused by the custodian, they can simply transfer the funds to the Roth IRA as adjusted for gain or loss. This is not a reportable transaction and is not a recharacterization. This is the easiest solution for the client and custodian, but custodians are reluctant to use this method.
Option 2: Since a rollover of Roth money to a TIRA is not allowed and becomes a non deductible excess IRA regular contribution, they could recharacterize it as a regular Roth contribution and issue a 1099R. The distribution from the Roth IRA would have to be reported as well as the recharacterization. Further, this would use up the regular contribution space for the year and client would have to qualify for a regular Roth contribution.
A 3rd option is for the client to use other funds to complete the rollover back to the Roth IRA within 60 days, or if the 60 days has passed a late rollover using the self certification form would work with custodian cooperation. The amount rolled into the TIRA can then be removed as an excess contribution to the TIRA that will replace the money used to complete the rollover from Roth to Roth. If client does not have the funds to complete the rollover before receiving the removal of the excess TIRA contribution, client will have to wait until this money is returned.
Since the 1099R forms issued must be reported on the client’s tax return, it is important to understand HOW the custodian is resolving this issue before the 1099R forms are issued next January. Only Option 2 involves an actual recharacterization. Therefore, the client needs to find out which of the 3 options listed above is being applied.
Permalink Submitted by Greg Middendorf on Fri, 2025-03-28 11:58
From what the client and custodian are telling me it appears they are moving forward with Option 2. I guess my concern is the 1099R and if this causes a tax issue for him.
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-28 13:07
How much was the Roth distribution deposited to the TIRA?
Permalink Submitted by Greg Middendorf on Mon, 2025-03-31 09:43
The amount was $55,000
Permalink Submitted by Alan - IRA critic on Mon, 2025-03-31 11:04
That’s far above the contribution limit. While the regular Roth contribution could be retained in the Roth if client is eligible to make that contribution (earned income but also not above the MAGI limit and regular Roth or TIRA contribution not made), most of it would be an excess and would then have to be removed from the Roth IRA as an excess contribution and would be lost to retirement accounts.
To save the rest of the Roth money, Option 3 would have to be used, in which the client comes up with 55,000 and within 60 days of the distribution makes a rollover contribution to the Roth IRA. If the plan used Option 2 and moved 55000 from the TIRA to the Roth IRA, client could then remove that portion from the Roth as an excess contribution and all his money would have been returned to the Roth IRA. But client can then report the first Roth contribution as a 55000 rollover back to Roth.
Of course, the recharacterization will also generate a 1099R as will the removal of excess from the Roth IRA, and the 2025 return will be much more difficult.