Fidelity made a mistake on my roth rollover

[Anonymous]

When I left my previous employer, I converted all my roth 401K to fidelity to IRA, but Fidelity put it in a pre-tax IRA account. Several months later, when I found out about this, I called Fidelity and they asked me to roll it over to roth IRA account and I did. Now I received tax form asking me to pay tax on this conversion which I already did at first. I have the document from my previous 401k provider to prove the money was after-tax contribution. Fidelity doesn't want to fix this for me and they pointed me to tax advisor/CPA. Can anyone tell me how to do this in Turbotax? (Prefer not to work with another CPA/tax advisor since I have filed the rest of my tax in turbotax).

Thanks!!!

[dmertz]

Fidelity should not be reporting this as a Roth conversion.  Because a traditional IRA is not eligible to receive a rollover from a Roth 401(k), the deposit in to the traditional IRA was an excess contribution.  What Fidelity should have processed is a return of contribution from the traditional IRA and a rollover (not conversion) to the Roth IRA of an amount equal to the amount of the original distribution from the Roth 401(k).  If there were any earnings while in the traditional IRA, these could not be rolled over and would be subject to tax and possible early distribution penalty.

If there were gains while in the traditional IRA, some amount that was moved to the Roth IRA should not have been.  Those gains deposited into the Roth IRA must be treated as an ordinary regular Roth IRA contribution.

Correcting this in TurboTax would require creating a substitute Form 1099-R showing a return of excess contribution instead of code 2 or code 7 for a Roth conversion.

However, be sure that your rollover was from a Roth 401(k) and was not just a rollover of after-tax money from a traditional 401(k) account.  What is the code in box 7 of the Form 1099-R from the 401(k) plan administrator?

[Anonymous]

Thanks for your reply! 

The code on the box 7 of the form 1099R  is 2. 

As of now, should I ask Fidelity to create a substitute form 1099R for me? Is this the best solution? 

If they don't, should I still file the tax without this form (but can possibly get audit by IRS)? 

[dmertz]

I think the code 2 Form 1099-R is the one reporting the conversion from the traditional IRA to the Roth IRA.  I'm asking about the other Form 1099-R, the one that reports the distribution from the 401(k) and does not have the IRA/SEP/SIMPLE box marked.  What is the code in box 7 of that Form 1099-R?  Does that Form 1099-R have a nonzero amount in box 5?

[Anonymous]

Box 5 shows a nonzero amount and the code in box 7 is BG. 

Thanks for the help!

[dmertz]

Codes B and G together indicate that this was indeed a distribution from a Roth 401(k) that was only permitted to be deposited into another Roth 401(k).  Depositing it into a traditional IRA made it a failed rollover and an excess contribution to the traditional IRA that, as I mentioned previously, needed to be corrected by a return of contribution, not a regular distribution, from the traditional IRA, then deposited into the Roth IRA as a rollover, not as a conversion.

If both the code-BG and code-2 Forms 1099-R were 2021 Forms 1099-R, as a return of contribution the code-2 Form 1099-R would instead have code 8 (along with code 1 if you were under age 59½).  Without precise details it's difficult to describe the true legal nature of the transactions, but if due to investment gains the amount moved from the traditional IRA to the Roth IRA was more than the amount deposited into the traditional IRA, the difference should be in box 2a of the code 8 Form 1099-R and that amount was not eligible for deposit into the Roth IRA as part of the rollover (and depositing that into the Roth IRA would be an excess contribution to the Roth IRA).  Ultimately it's a real mess to sort out the compounding of the several sequential errors.

A substitute Form 1099-R (Form 4852) is one that you would prepare as a substitute for the erroneous code-2 Form 1099-R provided by Fidelity.  The most difficult part is preparing the explanation statement that is part of that substitute form.

[Anonymous]

Thanks for the answer, I ll prepare form 4852 and a statement letter then. 

Fidelity doesn't know what to do with my case, do you have any idea? Maybe I can suggest something to them. 

[dmertz]

My first reply described what should have happened to resolve this properly.  It's doubtful that anyone but a specialist at Fidelity would understand this, and only if the situation was examined as a whole.

[Anonymous]

I just talked to Fidelity again and they refused to correct the tax form for me. 

They asked me to file form 5329 and saying this should prevent me from being double taxed. 

I am not sure if I should be using form 5329 or form 4852 as you recommended earlier, can you please advise? 

Thanks!!

[dmertz · Accepted solution]

It's not surprising that Fidelity would not change the Form 1099-R.  Given that the funds were already in a traditional IRA (albeit impermissibly), it's reasonable that when asked to move the money to a Roth IRA that the only apparently available way to do that would be by a taxable Roth conversion.

As I said previously, the only legal way to have corrected the original error would have been to process a return of contribution from the traditional IRA and to make a late indirect rollover of the original distribution from the Roth 401(k) by self-certification that this rollover would qualify for a waiver of the 60-day rollover deadline.  The substitute Form 1099-R (Form 4852) needs to replace the original code 2  Form 1099-R with one with codes 1 and P instead.  However, it's beyond the scope of this forum to address the details of  properly correcting the errors that occurred one after another, with each transaction making the problem worse.

[Anonymous]

I just completed the form 4852 in turbotax and looks like I don't need to pay for this double tax any more. (At least from what Turbotax told me now). 

Thank you so much for all the help!