401K and 401K Roth Rollover to Roth IRA - conversion? Reclassification? Big Boo Boo?

[millertraci72]

My company changed 401(k) providers (due to merger). I received two checks from my two 401(k) accounts in March. I made the mistake of depositing the 401(k) check directly into my Roth IRA. I flinched and then deposited the Roth 401(k) into the Roth IRA. I did not know I could change my first deposit and now I am trying to figure out how to report the conversion? recharacterization? The 1099Rs use the correct codes but I didnt deposit them correctly. I know I have to pay taxes on this but I have no idea where to start.  I have looked through previous posts but none of them quite cover this. There are similar stories but those were smart enough to put the checks in the correct accounts before recharacterizing the money. I looked up Form 8606 and went through the contributions section for the Roth IRA deposits. It says I can just remove money from the Roth to avoid paying taxes and that doesnt seem correct. Any help would be appreciated.

[dmertz · Accepted solution]

This exact problem has been addressed in this forum many times, but the forum search function is relatively inadequate for finding relevant posts.

By depositing the pre-tax funds into the Roth IRA, it became an irrevocable conversion.  As long as you put a zero in box 5 of TurboTax's 1099-R form and indicate to TurboTax that the entire amount was rolled over to a Roth IRA, TurboTax will treat the distribution as fully taxable despite the zero in box 2a.  If you want to make it more explicit that the distribution is taxable, you can enter and file a substitute Form 1099-R (Form 4852) showing the correct taxable amount in box 2a and providing explanation that the rollover was deposited into a Roth IRA instead of into a traditional IRA.

This transaction has nothing to do with Form 8606. 

[Opus 17]

You performed a conversion.  You rolled over your pretax 401k funds into a Roth IRA, which becomes a Roth conversion.  The bad news is that it is fully taxable now, and can't be reversed or recharacterized.  (You can't undo it and put the money in a regular IRA, for example.)

The good news is that once you pay the tax now, and as long as you leave the conversion funds in the Roth IRA for at least 5 years, that money will never be taxed again.  You also won't have to take RMDs in retirement. 

[millertraci72]

This definitely helped. I was rabbit-holing on the contributions form. It took me a two times through to get the substitute 1099R in place but it looks good now... expensive, but that probably means it's accurate. Thank you.

[millertraci72]

Yes, I did. It was a distracting day. I am actually very good at life but very bad at taxes. This is going to cost me about 18% of the deposit but that is how I know it's probably accurate. 

[dmertz]

Given that tax rates are scheduled to go back up in 2026 and that growth in the Roth IRA will eventually be tax-free instead of tax-deferred, you'll probably come out ahead in the long run.