Recharacterize a 401(k) withdrawal and separate Roth IRA contribution as a rollover to Traditional IRA?

[tweak]

I am doing my mother's 2017 taxes. She made a mistake last year with a taxable 401(k) withdrawal, and I think I found a way to correct it, per IRS rules. Please let me know if what I am suggesting below will work (or not, or if there is a better way).

What my mother did:

- She cashed out a small 401(k) in 2017 (for $6019).

- She then separately made a Roth IRA cash contribution for $6500 (within 60 days).

What I want to do:

- First, designate the Roth IRA contribution as a 60-day rollover (and taxable conversion) from the 401(k).

- Second, recharacterize a portion of the rollover as going into a Traditional IRA, instead of a Roth IRA. And avoid the taxes on that portion.

My mother is 74, so she can't directly contribute to a Traditional IRA. But she can do a rollover from a 401(k) to a Trad IRA. She separated from that 401(k) employer in 2017, and was not required to take a RMD until separation. She has until April 17, 2018 to take her first RMD from this 401(k), and I'll make the 2017 RMD amount is covered before the rollover portion.

[macuser_22]

Comment removed - you might be right.   A distribution subject to a RMD cannot be rolled over.

[tweak]

Thanks for your response. Why is a rollover to a Trad IRA not allowed? I thought there were no age limits on this (just on contributions).

[macuser_22]

Comment revised.

[dmertz]

macuser_22, I disagree with what I think you said [prior to the revision of your comment].  There is nothing impermissible about making a rollover from a traditional 401(k) to a Roth IRA in 2017, then recharacterizing a portion of that back to a traditional IRA, regardless of age.  (This *will* be impermissible for a traditional 401(k)-to-Roth IRA rollover done in 2018 due the recent tax-law changes prohibiting such recharacterizations.)

[dmertz]

Ah, good point about the RMD for the 401(k).  Her separation from service in 2017 *does* make 2017 the first year for which she is required to have taken an RMD from the 401(k).  If the cashing out of this 401(k) was her only distribution from the 401(k) in 2017, some small portion of the distribution, probably between 4% and 5% (the actual amount depends on the 401(k) 2016 year-end balance and her age on her birthday in 2017), would represent her RMD that was not eligible for rollover.  All amounts distributed from the 401(k) in an RMD year are RMD until the RMD is satisfied and RMDs are not eligible for rollover (even distributions made prior to separation later in the year).

[tweak]

Thanks, dmertz. So it sounds like you are saying my proposed two-step solution (designate as 60-day rollover, then recharacterize some as rollover from 401(k) to Trad IRA - less RMD) in my original post is consistent with IRS rules for 2017. Is that correct?

[dmertz]

I see no problem with that other than the fact the 2017 Form 5498 from the Roth IRA is likely to show this entirely as a regular contribution rather than part of it being a rollover contribution.  However, what determines the type of contribution is ultimately how you report it on your tax return.  It's not uncommon for the type of contribution to be incorrectly reported on the From 5498.  To minimize any need to provide explanation to the IRS, you might see if you can get the IRA custodian to show the split between regular and rollover contribution as you intend for it to be reported on her tax return.

[tweak]

Thank you very much, dmertz. My mother's IRA custodian is her local credit union. I will see if she can get them to do the two-step solution, and issue a corrected 5498 (and other tax forms, if necessary) to reflect the 60-day rollover and the recharacterization. I very much appreciate your advice.

[dmertz · Accepted solution]

Answered in the comments.