Late in 2022, my previous employer ended their 401k and I had to move my money. (Traditional 401k funds) Did it to an existing IRA account, but in completing the information, I mistakenly put down the account number for my Roth account with the same mutual fund.
I noticed as soon as the money moved that it had gone into the wrong bucket and spoke to the brokerage and they instructed me to send a letter and request it to be recharacterized which I did but it was 2023 before that happened. The 5498 documents now shows it as a Roth contribution for 2022. The account shows a recharacterization during 2023.
Did I blow it twice, once in the number error and then in listening to the brokerage? I'm not eligible for a Roth contribution and just wanted it corrected, but did I need to take the money back and then redeposit it? Reading now that Roth contributions can't be recharacterized post-2018 but it wasn't even eligible to go into that Roth account to begin with. I can only contribute to a Roth via the backdoor conversion.
"Did I blow it twice, ...?"
Probably. Moving these funds to the Roth IRA constitutes a taxable rollover to the Roth IRA (effectively the same as a Roth conversion from a traditional IRA but reported differently on Form 5498) and the Tax Cuts and Jobs Act of 2017 makes such a rollover irrevocable. No recharacterization of such a rollover is permitted.
What is the code in box 7 of the Form 1099-R from the 401(k)?
Is there a nonzero amount in box 2a?
Is there any tax withholding shown in box 4?
Is there any amount shown in box 5?
What box of the Form 5498 for the Roth IRA shows this amount?
With regard to dealing with the consequences, does the amount exceed the amount that you are eligible to have contributed to a traditional IRA for 2022 as a regular contribution? (It's possible that the result is a taxable distribution from the 401(k) and an independent contribution to the traditional IRA.)
That's what I've been afraid of as I started to figure it out.
What is the code in box 7 of the Form 1099-R from the 401(k)? G Direct Rollover and direct payment
Is there a nonzero amount in box 2a? 0
Is there any tax withholding shown in box 4? no withholding
Is there any amount shown in box 5? no value
What box of the Form 5498 for the Roth IRA shows this amount? Box 2 of the 5498 shows the amount. It's only Box 7 that says it went into a Roth IRA.
Amount is well above annual IRA contribution limits.
Any suggestions other than a time machine?
This is my take on this, not legal advice:
The Form 1099-R reports a direct rollover to a traditional IRA. However, depositing this into a Roth IRA transformed this transaction into an irrevocable taxable rollover to a Roth IRA, appropriately reported on the Form 5498 and an erroneous amount in box 2a of the Form 1099-R. There is no method provided under the tax code to allow undoing the error of rolling the 401(k) distribution over to a Roth IRA instead of to the intended traditional IRA.
Because moving the money from the Roth IRA to a traditional IRA cannot be done by recharacterization after tax year 2017, the distribution from the Roth IRA in 2023 constitutes a regular distribution, subject to Roth IRA ordering rules and potentially to a 10% early-distribution penalty depending on your age and how much basis you have in regular Roth IRA contributions, regardless of how the IRA custodian reports it, unless this distribution from the Roth IRA is rolled over to a Roth IRA. Because a traditional IRA is not an account that is eligible to receive a rollover from a Roth IRA, the deposit of this money into the traditional IRA constitutes a regular contribution for 2023 and is an excess contribution to the extent that it exceeds the amount that you are eligible to contribute for 2023.
It seems to me that the best outcome would accomplished by getting the money back into the Roth IRA. To do this you would have to obtain a return of contribution from the traditional IRA, then deposit an amount equal to the amount distributed from the Roth IRA into the Roth IRA as a rollover of the original Roth IRA distribution (regardless of the gain or loss adjusted amount of the distribution from the traditional IRA). If this rollover is more than 60 days after the date of the distribution from the Roth IRA, the Roth IRA custodian would have to accept a late rollover under IRS Notice 2020-46 with the reason being either deposit into an account that you thought was an eligible account (the traditional IRA) or, more likely, based on financial-institution error (their improper instruction that a correction could be made by recharacterization). Such a rollover is subject to the one-rollover-per-12-months rule, so you must not have done any traditional IRA-to-traditional IRA or Roth IRA-to-Roth IRA rollover in the one-year period preceding the distribution from the Roth IRA.
With the funds back in the Roth IRA, you would owe the tax but no penalty. On the plus side, gains in the Roth IRA will be tax free once your Roth IRAs are qualified. If the amount distributed from the traditional IRA as a return of contribution is more than the amount originally rolled over to the Roth IRA, the difference will be taxable on your 2023 tax return.
Thanks for the input. I'd be fine with paying the tax on it, but I'm not eligible for a Roth contribution so I don't think the money can go back into there without going through a backdoor conversion, which, since it didn't get into a rollover IRA correctly, I can't do. It can't be recharacterized out of the Roth, but it can't actually be in the Roth in the first place.
While I made the error on the first form, this sure illustrates the insanity that is our tax code.
There are no limits on rollover contributions (box 2 on the Form 5498). The annual and MAGI limitations only applies to regular contributions (box 1). Of course to be a rollover the funds had to come from a qualified account. Nothing prohibits you from rolling over to a Roth IRA any from your traditional 401(k) account that is not a required minimum distribution. The code-G Form 1099-R indicates that no RMD is involved.
(There used to be AGI limitations on Roth conversions, but that limitation was eliminated for tax year 2010 and beyond.)