Missed 60 day rollover-Revenue Procedure 2016-47

[rsmith31170]

According to the new self-certification procedure if someone were to miss the 60 day roll-over deadline, one of the mitigating circumstances was (c) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan".

I received a refund from IL TRS because of IL General Assembly Action that ended the ERO.  It was unexpected.  I took the distribution directly knowing I would have to pay tax and that tax would be withheld at 20%. What I did not know is that I had a deadline of 60 days to roll it over if I changed my mind.  Consequently, I placed the money in a savings account and forgot about it.  However, in doing my taxes I realized (something else I didn't know) that the additional income would make me ineligible for traditional IRA deduction and lower my child tax credit resulting in a tax ding of over $2000, almost half of the distribution.  Obviously, opting for the direct rollover would have been the best option, however, ignorance of the 60 day rule and of the fact that I couldn't just put it into the savings for a time hurt me.  Does this scenario sound like a scenario that qualifies as the circumstance above?

[dmertz]

Section 3.02(2) of Rev. Proc. 2016-47 lists 11 reasons that permit you to self-certify.  Your situation does not appear to match any of them.

The payer should have provided you with a notice describing your ability to roll this distribution over to another retirement account.  Prior to Rev. Proc. 2016-47, the IRS issued a number of PLRs waiving the 60-day deadline because the payer did not meet their legal obligation to provide this information.  However, this is not one of the listed reasons, and, of course, if the payer in this case actually did provide this notice, which seems likely under the circumstances, you were told about the 60-day deadline.  In the case of IRA distributions, PLRs have denied a requests for waivers for rollovers from an IRA where the deadline was missed due to ignorance of the deadline since the payer has no legal requirement to inform the recipient of the 60-day deadline for rollovers of IRA distributions.  However, the IRS has granted waivers to allow late rollovers of IRA distributions where the cause was incorrect rollover information actually provided by the payer, admitted to by the payer.

[tbjorkman]

Another question for you dmertz.  

Back in the summer of 2018, I rolled over a Roth 401k from a previous employer into a Roth IRA.  My intent was not to create a taxable event.  However, I didn’t realize tax hadn’t been taken on the employer portion of the Roth 401k, so I was surprised to learn I owed tax on the employer contribution portion as I was doing my 2018 return.  My question is whether in your opinion, a Roth is considered an eligible retirement account under Section 3c of Revenue Proclamation 2016-47 which states, “the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan.” 

If a Roth IRA is considered an eligible retirement account, then I would assume I need to go ahead and pay the tax.  If a Roth IRA is not an eligible retirement account, then my assumption is that I might qualify for this reason under the self-certification process. 

What is your opinion?  Have you seen this situation when a Roth 401k is rolled over to a Roth IRA and creates an unintentional tax liability?  Do you think this situation would qualify for a self-certification waiver or not?  Any thoughts you have would be welcome.  

[dmertz]

Yes, with respect to any rollover from a 401(k), a Roth IRA is an eligible retirement plan.  3.02(2)(c) applies only when the account into which the deposit is made was thought to be an account eligible to receive the rollover but actually was not, so in this case Rev Proc 2016-47 does not apply because a permissible rollover was completed. 

Prior to 2018 you had the option to recharacterize a rollover from a 401(k) to a Roth IRA to be a rollover to a traditional IRA instead.  The Tax Cuts and Jobs Act of 2017 permanently eliminated such recharacterizations, so you are stuck with paying the tax.  If you have a long time horizon before needing to take money from the Roth IRA, the benefit of long-term tax-free growth of this money in the Roth IRA will likely outweigh the short term benefit of tax deferral had it been rolled over to a traditional IRA since the money rolled over to the traditional IRA and the earnings thereon would eventually be entirely taxable.

No part of the amount rolled over from a Roth account in a 401(k) to a Roth IRA is taxable.  Done as a direct rollover, on Form 1099-R this would be reported with code H in box 7 and a taxable amount of $0 in box 2a.

Employer contributions to a 401(k) are made to the traditional account in the 401(k), not to the Roth account.  Generally, all of the money in the traditional account is pretax money, particularly the employer contributions and the earnings thereon, so, assuming that it's all pretax, any amount rolled over to a Roth IRA from the traditional account in the 401(k) is irrevocably taxable.  Done as a direct rollover, on Form 1099-R this would be reported with code G in box 7 and the taxable amount in box 2a would be the same as the gross amount in box 1.   (If any portion was after tax, this portion would be shown in box 5 and the amount in box 2a would be reduced accordingly.)