Corrected 1099-R's for both Traditional and Roth 401K Distributions. Now the Traditional IRA has Roth money.

[testmarie2]

In 2023 I opened and closed my Principal Financial 401K accounts for both Traditional and Roth. 

I opted for a Distribution for both and when I rec'd the checks, I rolled them over to my Vanguard Traditional IRA and Roth IRA accounts respectively within 60 days.

When I rec'd my 1099-R's for 2023, I noticed the amounts were incorrect.  My last Roth 401K contribution for $515 was in the Traditional 401K.  Principal Financial corrected the error and sent me corrected 1099-R forms.

Now the amounts I rolled over to Vanguard are incorrect.  The $515 is in the Traditional IRA instead of the Roth IRA.

I called Vanguard to do an internal back office transfer from the IRA to Roth for $515 and send me a corrected Form 5498 to reflect the correct Contributions but they are refusing to do so.

So the IRS has corrected 1099-R's but not a correct Form 5498 and my after tax $515 is sitting in a pre-tax IRA.

How do I get this corrected?

[dmertz · Accepted solution]

Because the $515 distributed from the Roth 401(k) was not eligible to be rolled over to a traditional IRA, the $515 constitutes deposited into the traditional IRA constitutes a regular contribution to the traditional IRA.  If by April 15 2024 your filed your 2023 tax return or requested a filing extension, you have until October 15, 2024 to obtain an explicit return of the $515 contribution.  To get Vanguard to do this you'll need to convince Vanguard that this $515 constitutes a regular contribution despite Vanguard having originally recorded this portion as a rollover.  With a return of contribution, Vanguard will distribute to you the $515 adjusted for the rate of investment gain or loss in the account while the $515 was in the account.  (If Vanguard is uncooperative, you can report the $515 on an amended 2023 tax return as a regular, perhaps nondeductible, $515 traditional IRA contribution, assuming that you have not already made the maximum IRA contribution for 2023.)

Separately, to get the $515 into the Roth IRA, you can self-certify under IRS Rev. Proc. 2020-46 that you would qualify for a late rollover of $515 due to financial-institution error.  To allow the deposit of the $515, the IRA custodian must be willing to accept the self-certification.

[testmarie2]

Thank you for that info.  I did extend my 2023 return. 

I just got off the phone with Vanguard and they said they can do an excess removal and send me the $515 and then I can self certify as you mentioned and roll it back into the Roth.  They said I should wait until after Aug 15th to meet the 1 year rule to roll it over since the initial roll over was on 8/15/2023 and they will assist me to roll it into the Roth.

Thank you again for your help!

[dmertz]

The Vanguard rep gave you bad information regarding a need to wait.  Rollovers from a 401(k) are not subject to any limitations on the timing of rollovers.  The 1-year rule does not apply.  If fact, under self-certification the rollover is required to be completed as soon as is practicable, so you can complete the rollover of exactly $515 even before you receive the distribution of the $515 (adjusted for investment gain or loss) from the traditional IRA.

From IRS Rev. Proc. 2020-46:

The contribution must be made to the plan or IRA as soon as practicable after the reason or reasons listed in the preceding paragraph no longer prevent the taxpayer from rolling over the amount distributed (which  includes any amount withheld for income tax) or a lesser amount if the taxpayer wants to roll over less than the total amount distributed or if part of the amount distributed is ineligible for rollover. This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason or reasons no longer prevent the taxpayer from making the contribution.

[testmarie2]

Oh wow!  I will call Vanguard now and get this rollover done today. 

I am still also trying to understand what to include in my 2023 return to address this issue. 

I went to the IRS website on Self Certify https://www.irs.gov/irb/2020-45_IRB#REV-PROC-2020-46 but that appears to be a letter I write to Vangaurd.

So I would not need to include anything additional in my 2023 tax return?

And I assume I will receive a 1099-R in 2024 for the $515 IRA withdrawal?  Not sure what distribution code they will use but I will ask to avoid paying taxes on that money in 2024.

[dmertz]

Correct, you provide the self-certification letter to Vanguard as described in Rev. Proc. 2020-46.

You'll include the corrected 2023 Forms 1099-R on your 2023 tax return, not the originals.  If the distribution of the $515 from the IRA is accompanied by taxable gains, those gains are includible as taxable income on your 2023 tax return by the entry of the code P 2024 Form 1099-R that you will receive near the near of January 2025.  (You'll know the amounts that will be present in boxes 1 and 2a of that form by the amount distributed as the return of contribution.  The amount distributed will be in box 1 and the difference between that and $515, if positive, will be in box 2a, otherwise box 2a will be zero.)

[testmarie2]

Perfect!  Thanks again for all of your help!!

[testmarie2]

Hi Dmertz,

Still trying to complete my 2023 tax return for the excess contribution of $515.

Vanguard did withdraw the funds and sent me $632.

I sent them a check for $515 with self certified letter and they deposited it into my Roth IRA account.

My 2024 1099-R from Vanguard will be:

Box 1 $632 

Box 2a $117

Box 7 code P

And the year is 2024

When I enter the 1099-R into Turbotax, Form 8606 is showing:

line 1 non deductible contributions $515

line 14 total basis in traditional IRA for 2023 $515

In the flow I answered the following questions:

Enter total amount put into traditional IRA for 2023 = $515

Amount switched from traditional IRA to Roth = 0

Any excess IRA contributions before 2023 = No

Yes I made and tracked my nondeductible contributions to my IRA

Total IRA Basis as of Dec. 31, 2022 = 0

No to Repayment of Retirement Distribution

Enter your Roth IRA contributions for 2023 = 0

Amount switched from a Roth to Traditional IRA = 0

No to Any Excess Roth Contributions

Yes to make IRA contribution nondeductible = 515

Your IRA deduction = 0

I just want to be certain that I am only taxed on the earnings of $117 and there is no impact on my 2024 return when I receive the 1099-R.

Your help is greatly appreciated.

Thanks, Marie

[dmertz]

The amount on line 1 of Form 8606 and the questions that you answered indicate that you have mistakenly entered a regular $515 traditional IRA contribution.  You need to remove that.  This is not the result of entering the Form 1099-R.  When asked to "Enter total amount put into traditional IRA for 2023" you must leave it blank.  The $515 was part of the rollover entered via the corrected code H Form 1099-R from Principal Financial.

[testmarie2]

Thanks!   Form 8606 is now removed.