Mistake in depositing cash balance ($25000)distribution check. It should have gone into traditional IRA but I put it in ROTH. JUst recognize the error.

[DocSKH]

I read everything on the web and found two solutions...assuming no change in the 1099R form which showed G (rollover).

1. Modify the 1099R form so it shows distribution into ROTH and TT will calculate the tax. My questions are: is this OK by IRS? How about the gain it has made (almost 50%!)? Will it exceed the contributions limit and impose a penalty till I withdraw?

2. Recharacterize the whole sum + any capital gain back into a traditional IRA. I tried that and TT said I have excess IRA contribution and will impose a 6% penalty till I withdraw.

3. Withdraw the contribution and gain into cash from ROTH and pay tax this year. I'm over 65 and should be OK. But how about the 5 years no withdrawal rule?

Any suggestion?

[SusanY1]

If you prefer to leave it in the Roth, you can treat it as a conversion and pay the tax on the amount converted.  You can modify the 1099 in that case to make it work, and the IRS will be okay (after all, it correctly represents what happened and results in taxes due.)  

If you prefer to keep it in a traditional IRA you should contact your financial institution to see if they can make a correction for you.  Recharacterizations are no longer allowed, which is why you see the penalty in TurboTax. Your bank or brokerage firm may be able to make a change based on the error.  Whether or not they can do this will depend on the length of time since the mistake and the firm's policies.  You would request this from the firm that currently holds the assets.

While you could withdraw it all, you'd then also pay tax on the earnings, which would result in more tax without any real benefit that I can see.  

 

[DocSKH]

Thanks that's sensible and a reasonable remedy even though I wanted to keep it in a traditional IRA this year to lower my AGI and qualify for a $7500 EV tax benefit. This oversight disqualified me and cost me dearly!

TT will not allow me to check the ROTH rollover box without modifying the 1099R which I did without any protest from the computer!! Hope IRS computers will allow it!

Any further thoughts on the need to report the capital gain?

Thanks!!

[fanfare]

"A conversion of a traditional IRA to a Roth IRA,
and a rollover from any other eligible retirement plan to a
Roth IRA, made in tax years beginning after December
31, 2017, cannot be recharacterized as having been
made to a traditional IRA."

@DocSKH 

[fanfare]

There is no capital gain, it is ordinary income.

Fudging the 1099-R to get the tax consequences you want is frowned upon by IRS.

@DocSKH 

[fanfare]

" Will it exceed the contributions limit and impose a penalty till I withdraw?"

This is not a contribution. The contributions limit does not apply.

[fanfare]

`1099-R says nothing about where the money went.

You don't modify your 1099-R,

You enter it and then tell TurboTax what you did.

When you say it went into your Roth account, it will become taxable.

@DocSKH 

[DocSKH]

I was concerned that IRS wouldn't like me changing the 1099R. I consulted Schwabs who originated the form. But She declined.

TT is stubborn. It won't allow the ROTH option unless the 1099R switches are modified from G to 2 or 7.

Some said that Cash-balance distribution (rollover) is not the same as 401K. It is treated as a cash contribution and recharacterization is allowed.....

Any other ideas?

[DocSKH]

should I give the online version a try? Maybe I need to try HR block or go paper this year.........

[fanfare]

as you know, a Rollover to a Traditional IRA within 60-days is tax free.

A Rollover into a Roth IRA is not.

if you choose to report as rollover to a Traditional IRA (the usual action), that's your business.

If you are not audited, you'll probably get away with it.

@DocSKH