To hopefully help others with this issue in the future, here is a summary of everything and what I did to (hopefully) resolve my problem:
- In 2024 I rolled over my Vanguard Roth 401k into a long-established Schwab Roth IRA.
- The contents of the ROTH 401k included both my post-tax contributions as well as my employer’s pre-tax contributions (as allowed per the 2022 SECURE Act 2.0).
- Vanguard’s Disbursement Confirmation Letter for the rollover distinguished my post-tax employee contributions as non-taxable, and my employer’s pre-tax contributions as being taxable as ordinary income.
- However, the 1099-R that I received from Vanguard showed the full amount as Gross Distributions but declared there was no amount taxable. The 1099-R only provided a Distribution Code of "H" (Direct rollover of a designated Roth account distribution to a Roth IRA) and showed the correct amount for my employee contributions but noted "$0" in the "Taxable Amount" box.
- After requesting a revised 1099R, an internal review at Vanguard declined to either modify the 1099-R or to split it into two 1099Rs with different distribution codes.
- A Schwab representative suggested using their Recharacterization Form to ask Schwab to recharacterize and move the pre-tax amount into my regular Schwab IRA.
- Their response to my request was that due to the Tax Cuts & Jobs Act of 2017 they were not allowed to recharacterize anything in a rollover nor treat any part of it as a conversion - and that I had to shift the pre-tax funds into my margin account as an excess contribution by the April 15 deadline for the 2024 tax year.
- In a later call to Schwab, a different representative said that I could use their “Certification for Late Rollover Contributions” form to justify a subsequent move of the funds from my Schwab Margin Account into my Schwab IRA (Where I believe it should have been deposited during the rollover process).
- The form allowed a “self-certification” of the reason for missing the usual 60-day rollover deadline (“An error was committed by the financial institution making the distribution or receiving the contribution”).
- It will ultimately be up to the IRS to allow or deny this self-certified correction to my rollover – most likely in response to the statements from Schwab that declare these movements of funds for my 2025 taxes (a statement of the funds leaving the ROTH IRA, plus a statement of the funds entering my regular IRA).
- In hindsight, I might have less anxiety over the IRS accepting my certification to correct this issue if I had moved the employer-contributed funds out of my ROTH IRA and then into my regular IRA within the normal 60-day window after the rollover distribution.
