Revised Version:
In early 2024, I rolled over both a traditional 401(k) and a Roth 401(k) from my previous employer into my new accounts with my current employer. My old employer issued a single check combining the balances of both accounts, and I wasn’t provided with an option to separate the funds. Following my new employer’s process, I submitted the check through their app and mailed it along with a letter specifying the desired split between the accounts, as well as documentation proving the origin of the funds from the old employer. However, these two actions canceled each other out, and all the funds were mistakenly deposited into the traditional 401(k) at my new company.
Initially, I wasn’t provided many solutions to address the error and was informed that any corrections might have taxable implications. Since the deposit:
- I’ve invested the portion of funds that were correctly in the traditional 401(k).
- The portion intended for the Roth 401(k) has remained in cash and has not been invested.
The options I’ve been given to resolve the mistake are:
An In-Plan Rollover: This would involve moving the Roth portion back into a Roth 401(k) within the same plan. However, I was told this would trigger a Form 1099-R, and the Roth amount could potentially be subject to income tax, leading to double taxation on the contributions.
An Excess Contribution Correction: This would involve removing the Roth portion and any associated gains from the traditional 401(k). The excess amount would then be taxed, and because my total account has gained approximately 30%, the Roth portion would be adjusted upward to account for the investment growth before being taxed.
Here’s how I see the situation (please correct me if I’m wrong):
- If I leave the Roth funds in the traditional 401(k) and invest them, I’ll face double taxation—once on the original contributions (which have already been taxed) and again on the gains when withdrawn.
- If I choose the in-plan rollover, the 1099-R issued may result in the Roth amount being taxed as income, again leading to double taxation.
- If I go with the excess contribution correction, the Roth amount will be adjusted based on the account’s gains, and I’ll pay taxes on the adjusted excess amount.
The excess contribution correction seems like the best option to minimize my tax liability, but there’s a complication: by the time any action can be taken, it will likely be 2025.
Is there a way to resolve this without incurring a tax penalty? I’m trying to make the best decision before moving forward, though I realize that my inaction has contributed to worsening the situation. Any guidance on how to proceed would be greatly appreciated.
