Hello, i accidentally rolled over a pre-tax part of my Roth401k ( employer match) into my Roth IRA. Can I take from Roth IRA and invest in trad. IRA for tax break?

[kenlh2020]

i am 62 yrs old, my wife has her own traditional IRA that we take the 7500 tax break each year filing joint. Can i take 7500 from my Roth IRA ( fully vested) and put it in my traditional IRA for tax break?

[Opus 17]

First, you need to clarify what you did with the trustee.  

Even if you have a designated Roth account in your 401k, employer contributions (match) are pre-tax and must be held in a separate pre-tax account.  If you do a direct trustee transfer, the Roth IRA trustee should refuse to accept a transfer from a pre-tax account, and should instead transfer that money into a traditional pre-tax IRA for you.  Alternatively, if you intentionally put the pre-tax money into a Roth IRA, that would be a conversion, and is fully taxable in the year it happened.  You will get a 1099-R and must report the conversion on your tax return and pay income tax.

If you did an indirect rollover, where you got a check from plan A and deposited it yourself in plan B, then you could have made this mistake.  You should have gotten separate checks from the pre-tax and Roth 401k accounts.  If you deposited them both into the Roth IRA, then one was a rollover and one was a conversion.  You also violated the once-per-year limit on indirect rollovers.

So did you accidentally do a conversion?  Were these direct transfers or indirect?  What date did this occur?  (In 2024?  More or less than 60 days ago?)

At worst, you have a taxable conversion, but a conversion is not a contribution, so you can still make contributions.  But you need to make sure this is reported correctly by bank B.  If you don't want to do a taxable conversion, then you may be able to reverse the transaction, but it depends on the timing.

@dmertz 

[kenlh2020]

Thank you so much for responding. Yes, it was my mistake, one of the two checks went direct rollover, the second was lost and i had it sent to me directly, and i deposited the 12,000 check into the Roth IRA account. A day after the deposit  I contacted  the Roth IRA account firm where it was deposited, I was told that by law they could not do a  Recharacterization of the deposit to my traditional pretax account. this happed 8/8/2024. I would love to know how i could just reverse this transaction and put the money in the pre-tax IRA. If not, what can i do to lighten the tax burden? and, how to avoid a penalty for this mistake?

In 2022, when i did my taxes i  contributed to my traditional IRA and my wife's IRA, but turbo tax would not allow both tax deductions because i had a job sponsored  401k ( Roth) . Is this true? 

[Opus 17]

@kenlh2020 

The new bank is correct.  Once you performed the indirect rollover of pre-tax funds into a Roth IRA, that can't be reversed.  Sorry about that.  At $12,000, you will likely owe about $3000 of income tax (more or less), plus state income tax.  To avoid extra penalties for under-payment of taxes, you should either make an estimated tax payment by September 15 of at least $2000, or increase your withholding at your job(s) to cover at least $2000 of the taxes by the end of the year.  (As long as you owe less than $1000 when you file your return, and you either made the estimated payment or had withholding to cover the tax, you won't owe a penalty.)

That type of recharacterization was disallowed starting in 2018, I don't know why.  I suppose some people were abusing it somehow.  

You could make a new contribution to an IRA, up to $8000 per spouse, as long as you have compensation from working.  It doesn't matter where the money comes from.  But it can't be a transfer from one IRA to another. It could be a withdrawal, and then a new contribution.  Whether the IRA contribution is tax deductible depends on your income, job status and filing status as described below.  If your income and job situation is similar to 2022, it sounds like an IRA contribution is not tax deductible for you. (see below).

You can always make Traditional IRA contributions up to the limit (for example, $7000 for 2024 plus $1000 catch-up if over age 50).  However, if your income is too high, the contribution can't be deducted.  The limits are given here, and depend on income, filing status, and if you are covered by a plan at work.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-li...

https://www.irs.gov/retirement-plans/2023-ira-deduction-limits-effect-of-modified-agi-on-deduction-i...

I have not heard any complaints that Turbotax applied the limits incorrectly, so your contributions for 2022 are probably non-deductible.  That creates a "basis" in your IRA, so that a portion of any future withdrawals are tax-free.  (For example, if your balance is $100,000 and includes $8000 of non-deductible contributions, then 8% of all future withdrawals will be tax-free even though IRAs are normally taxable.)

To document the taxable basis in your IRAs, you need to keep copies of the form 8606 that is generate for each person who has a basis.  Save your form 8606s with your important tax papers for as long as you have funds in the IRA.  This is an important exception to the general rule that tax papers can be discarded after 3 or 6 years.)

[dmertz]

First, your 401(k) consists of two accounts:  a traditional 401(k) account and a designated Roth 401(k) account.  The distribution from the designated Roth 401(k) account is only permitted to have been rolled over to the Roth IRA, so that rollover apparently was done correctly.  What I believe that you are saying is that you also rolled the distribution from the traditional 401(k) account over to the Roth IRA.  If so, this rollover is irrevocable and is taxable, despite the code-G Form 1099-R for the distribution from the traditional 401(k) account likely showing that $0 is taxable.  The Tax Cuts and Jobs Act of 2018 eliminated the option to recharacterize the rollover back to a traditional IRA, so there is no option but to include the amount in your taxable income and pay the tax.

In the long run you'll probably benefit from having done this rather small taxable rollover to the Roth IRA since future growth will eventually be tax-free once you have met the requirements for qualified Roth IRA distributions.

[kenlh2020]

Hello, just to clarify, the distribution from my Roth 401k was two checks, first check was a proceeds check and rolled directly to the Roth IRA. The second check, which apparently was my company's pre-tax match check. this check was supposedly "lost" for two months, so i had them send it to me. then I mistakenly deposited into the Roth IRA. 

My understanding is i need to pay taxes on this 12K deposit mistake. which is fine, i will simply increase my federal & state withholding to cover the estimated taxes. I just want to make sure there is no penalty that needs to be address for exceeding the yearly contribution or is this still a legal transfer?  or, should i withdraw the excess payment from the Roth IRA? 

[Opus 17]

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@kenlh2020 wrote:

Hello, just to clarify, the distribution from my Roth 401k was two checks, first check was a proceeds check and rolled directly to the Roth IRA. The second check, which apparently was my company's pre-tax match check. this check was supposedly "lost" for two months, so i had them send it to me. then I mistakenly deposited into the Roth IRA. 

My understanding is i need to pay taxes on this 12K deposit mistake. which is fine, i will simply increase my federal & state withholding to cover the estimated taxes. I just want to make sure there is no penalty that needs to be address for exceeding the yearly contribution or is this still a legal transfer?  or, should i withdraw the excess payment from the Roth IRA? 

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By depositing the pre-tax check into a Roth IRA, you completed a rollover--which also happens to be a special type of rollover also called a Roth conversion.  You owe income tax because it was a conversion.  But because it also counts as a type of rollover, it is not considered a contribution and does not impact your normal contribution limit.  If you are concerned, you can contact the Roth IRA custodian and verify that they processed the check as a rollover/conversion and not as a contribution.

You don't want it to be a contribution, because if it is treated as a contribution and you remove it from the Roth IRA, then it counts as a withdrawal from the 401k.  Then it is still subject to income tax plus a 10% penalty for early withdrawal, and you lose the tax-free growth of the Roth IRA.  If the Roth IRA custodian did code it as a contribution, you need to show them proof that it was a rollover so they get the paperwork straight.