Converting to Traditional IRA to Roth IRA

[dmertz]

A distribution of the excess $1,500 contribution would need to include attributable net income.  The attributable net income would be taxable.  Because the $1,500 was not an amount that had been excluded from income previously (it was not an excess elective deferral that had been excluded from box 1 of your W-2), it should not be taxable again.

The late Roth conversion of $1,500 would be a separate transaction.

Ideally, the original code-G 2024 Form 1099-R would be corrected to show $0 of code-G distribution and a separate new Form 1099-R showing code 1, 2 or 7 which you would report as having been converted to Roth.  You would also get a code 8 (or maybe code E) 2025 Form 1099-R showing the distribution of the excess from the 403(b) with the attributable net income being the taxable amount.  Absent these corrections you would have to report substitute Forms 1099-R with explanation.

[tractng]

Really messy.

Called the TIA and they are looking at the case (will take up to 2 business days).  Talked to the IRS which they told me to have TIA handle the situation.

"Ideally, the original code-G 2024 Form 1099-R would be corrected to show $0 of code-G distribution".  Which box of the 1099-R is the $0 you are referring to?

[dmertz]

All boxes previously showing dollar amounts on the code-G From 1099-R would have $0 to indicate that no such rollover occurred.

[tractng]

The form 1099-R right now have $2,393.83 on boxes 1 & 16.

[tractng]

Let me confirm this.

"a separate new Form 1099-R showing code 1, 2 or 7 which you would report as having been converted to Roth"

   - Is this Form 2024 or Form 2025?

[dmertz]

2024 since the distribution from the traditional IRA occurred in 2024.

[tractng]

So the correct path now is to move the entire $2500 out of the 403b, roll the $1500 to the Roth IRA.  Then put the $900 back into 403b?

Btw, $2500 is just a number i used in the post. Its actually $2393.

[dmertz]

[Edit] I think I misunderstood.  Reviewing your previous posts, I see that you rolled over to the 403(b) $2,500 of which $1,500 was basis in nondeductible traditional IRA contributions.  The $1,000 of pretax money can stay in the 403(b).  Only the $1,500 and gains attributable to the $1,500 need to be distributed by a return of excess contribution.  You, could have the entire amount distributed an then roll back the $1,000 and any gains attributable to the $1,000, but distributing that portion is unnecessary.

[tractng]

Lets do a quick recap.

Traditional IRA was opened in 2019.  All $1500 were non deductible.  The account grew to $2500 (nice round number to use for this sample).

So you are saying the options to take to correct the mistake:

1) Keep $1000 in the 403b, then distribute $1500 to the Roth IRA

2) Distribute all $2500, then move the $1000  back into the 403b.  Then $1500 to Roth IRA

Currently the Traditional IRA has $0.

I am trying to learn whats the easiest way for TIA.  A simple procedure on the original request was supposed to be easy :-).

[dmertz]

"Keep $1000 in the 403b, then distribute $1500 to the Roth IRA"

I would not phrase it that way.  Too much room for misinterpreting it as an instruction to do a taxable rollover from the 403(b) to a Roth IRA.  Consider the corrective distribution from the 403(b) to be a transaction independent of completing the rollover of the original $1,500 of basis to the Roth IRA.

Assuming that you had no other funds in traditional IRAs, your original intent appears to have been to convert the entire $2,500 to Roth, paying taxes on the $1,000 that was in excess of your $1,500 of basis.  However, the rollover of that $1,000 to the 403(b) was permissible, so that portion probably must stay in the 403(b).

I had forgotten that $1,000 was rolled over to the 403(b) permissibly, so a corrected code-G 2024 Form 1099-R would show this $1,000 as the amount rolled over rather than the original $2,500 (not $0 as I said previously).

You are correct that there are many ways to make the situation worse by making inappropriate transactions.  If you want to, you could probably just abandon the $1,500 of basis and leave things as they are.  The IRS is unlikely to ever complain about doing that, and would be unlikely to even detect the problem without an audit.

[tractng]

"corrected code-G 2024 Form 1040"

- you meant 1099-R?

I will ask TIA for an update and see what they say.  It might be best to just don't do anything.

[dmertz]

Yes, Form 1099-R.  I've made the correction.

[tractng]

Got the call back from TIA.  They did listen to the voice recording from the request in Oct.  They are still working on the corrections.

I kept on telling them about the basis of $1500 but customer service said it doesn't matter since they don't know that amount (its for my taxes).

[tractng]

So I got a call from TIA this morning and was told they couldn't make the correction.

 They offered to compensate the amount that I was affected. I told them there isn't any amount in the foreseeable future (until 59.5). I then had to fight hard to get a letter for record keeping. I probably will continue to file tax with the original 1099-R (box 7 code G).

Here is the letter.

I am responding to your concerns regarding your delayed rollover request. I would like to
apologize for the mishandling of your request and acknowledge the inconvenience and
concern this has caused you.
Due to a TIAA processing error, your ROTH ROLLOVER request was processed incorrectly
and instead was rolled over to an employer plan.
Unfortunately, we cannot change our records to reflect the year when you intended for this
rollover to occur. We are legally required to report all rollovers and payments as income in
the year which they are paid. Consequently, your payment(s) will be reported as part of your
2024 income.
We recommend you keep this letter as part of your permanent records to support your
request to the IRS. As with any tax matter, we suggest you seek the advice of your tax
advisor for additional assistance. TIAA is unable to provide legal, tax or accounting advice.

[tractng]

dmertz,

So thinking out loud for the last time.  Can I request a rollover of the $1500 basis from the deferred account (403b) to a Roth IRA?  Then next year when I get a 1099-R, I could attach an explanation (the option on TurboTax regarding incorrect 1099).   If I couldn't explain it, I would just pay the tax on the amount of the rollover and at least have something to show that I made an effort to correct that mistake (if an audit comes up)?

Is that doable or should I just leave it as it and move on with life (like you said earlier it could get worst trying to fix it)?

   -I would continue filing the 2024 tax using the original 1099-R received with "G"  on box 7

Thanks again! 

TT