I just realized I mistakenly rolled my Roth 401k in Nov 2019 to Rollover IRA instead of Roth. The deadline for recharacterization was 10/15/20. Can I apply for extension?

[dmertz]

This is an error that is complicated to correct, made worse by the amount of time that has elapsed.  The IRS provides no specific guidance on correcting this, but it's not something that could have been corrected by simple recharacterization.  Because a traditional IRA is not an account that is eligible to receive a rollover from a Roth 401(k), this is technically a failed rollover and a regular, probably excess contribution to the traditional IRA subject to penalty.  Seek the help of a tax professional who has experience with this situation, although one might be hard to find.  It may be possible to correct this by obtaining a distribution from the traditional IRA of the excess contribution (after the due date of your 2019 tax return) and completing the rollover to a Roth IRA under self-certification under IRS Notice 2016-47 that this would qualify for a waiver of the 60-day rollover deadline, but that wouldn't avoid an excess contribution penalty for 2019 (and for 2020 as will since this will likely not get resolved by December 31, 2020).  You'll have to amend your 2019 tax return no matter what you do.

[akapa86]

Thank you so much. I read somewhere that the custodian should not have deposited roth funds into a rollover account - is that true? I got copies of distribution documents from the roth 401k plan provider and the distribution code is "H Dir rollover of a desig Roth acct distrib to Roth IRA", so shouldn't etrade have put in my roth account instead of a rollover ira? if so, couldn't they correct 2019 form 5498 to say that it was a roth ira rollover and correctly move funds to the roth ira?

[Critter-3]

If you did the conversion using a DIY  Etrade account then most likely  no administrator at Etrade was involved so they could not catch the error.   Seek help from them to see if and/or how this can be corrected  and/or seek local professional guidance to get this corrected satisfactorily before the IRS catches the error.  

[akapa86]

thank you.

[dmertz · Accepted solution]

Depends on how the payee of the payment to the IRA custodian for you benefit was worded.  A proper direct rollover, indicated by the code H Form 1099-R, must identify the payee actual account that is to receive the rollover, or at least include "Roth IRA" in the wording but even better if it includes the account number of the Roth IRA.  However, a huge number of plan administrators fail in this regard, making the payee simply be the new IRA custodian for your benefit, allowing the IRA custodian to deposit the funds into any type of account for your benefit, including a non-retirement account.  It then falls on you to make sure that the rollover was completed properly.

Had you recognized the problem quickly, the fix would have been to explain to the IRA custodian that the deposit to the traditional IRA needed to be distributed as a return of contribution since the traditional IRA was not eligible to receive the rollover, then within 60 days of the distribution from the Roth 401(k) complete an indirect rollover to a Roth IRA.  The correction now is much the same, but complicated by the fact that it is now past the extended due date of your 2019 tax return and well beyond 60 days from the date of the distribution from the 401(k).

This can't be the first time that this IRA custodian has seen a situation like this, so perhaps they can tell you the procedure that they followed in the past to correct this type of error.  This will require someone in their back office to address this; front-line reps will be clueless.

[Joe Dyer]

@akapa86 did you ever find a resolution to this?! I am in the same situation and not scrambling to fix this as I thought I could find a solution online but struggling.  

[Cynthiad66]

This is a very complicated issue.  You should check with the plan administrator for directions on how to proceed.

@Joe Dyer

[dmertz]

This is not something a plan administrator will be able to help with.  Unless the plan administrator made the error by depositing the funds into a different account than the one that you specified to the plan administrator to be the destination of the rollover, this is entirely between you, the IRA custodian and the IRS.

[eva01]

I have a similar issue but instead from Roth401K to rollover IRA its a 401K to ROTH IRA.

It happened during early COVID (2020) and my wife was pregnant, it was a hectic time. the transaction was online (not normally done but since it was COVID they did it online) and it just happened that the selected account number was the ROTH account instead of the rollover account. Life moves on and for some reason I did not to notice it until this year. 

I consulted with a CPA and given 2 options:

1. let it go and hope that IRS overlook it (BAD idea)

2. Amend the return, pay 10% excise tax penalty plus all applicable income tax caused by it. 

I wonder if there is other solution (recharacterize it?) since we don't have the means to pay the applicable income tax and the 10% excise tax generated by this.

Any further discussion / advise is appreciated.

[dmertz]

@eva01 , I assume that this was not a rollover of a Coronavirus-Related Distribution or any other type of disaster distribution, just an ordinary rollover.  The rollover you did was a permissible taxable rollover and is not permitted to be undone.  If the Form 1099-R from the 401(k) plan did not report this as a taxable rollover and you did not report this as a taxable rollover on your 2020 tax return, you must amend your 2020 tax return to show this taxable income by submitting a substitute Form 1099-R that shows the correct taxable amount in box 2a.  Being a permissible rollover, there is no 10% penalty but the IRS will almost certainly bill for interest and maybe an underpayment penalty.