Mistakenly deposit to Roth IRA from my checking account

[Chris411]

I supposed to roll over my Roth 401k to a newly opened Roth IRA, but I transferred the money from my regular checking account. The transaction is made within a week and is labelled as rollover according to the Vanguard rep. Now I have 26k in the Roth 401k and 26k in the Roth IRA.  Can I just transfer the money back to my checking account from the Roth IRA without any tax penalty? Or what else so I do? Thanks.

[Opus 17]

That's a weird one.  @dmertz 

Normally, an "indirect rollover" is perfectly fine.  You take the money out of the 401k, deposit it to your checking account, then send a check or electronic deposit to the new IRA.  You have 60 days to do this, and you can only do this once per year.  (You can make more than one "direct" bank-to-bank rollover per year, but only one time per year where the money goes through your account.)

However in this case, you did the second step before the first step.

I have asked an expert to comment.

I have two comments myself.

First, if you ask the 401k to send you money as a rollover, they might send the check as "John Smith in trust for John Smith's IRA".  If that's how the check is labeled, you can only send it to the IRA, you can't cash it.  So you are stuck with too much money in the account.

My second comment is that, I think you can contact the new Roth IRA, say "it was all a mistake", withdraw the mistaken contribution, and close the account.  You will also have to withdraw any earnings, and those earnings  will be taxable on your 2024 tax return.  Then, you can go back to bank #2, open another new Roth IRA, and do the direct transfer correctly this time.

I don't know if you can withdraw the money from the 401k after making the deposit to the new Roth and call it a rollover.  I think you can fix this situation, but not in that manner.  I think the order of events has to be different. 

[Chris411]

Thank you for the detailed reply.

Regarding to your second comment, do I have to close the IRA account? Can I just withdraw the contributed amount?

[Opus 17]

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@Chris411 wrote:

Thank you for the detailed reply.

Regarding to your second comment, do I have to close the IRA account? Can I just withdraw the contributed amount?

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Using that method you would not be required to actually close the account but you would be required to withdraw the mistaken contribution plus any earnings attributed to the mistaken contribution.  Since it is a new account and the only contribution is the mistaken one, that means withdrawing all the funds and leaving the account with a zero balance for a few days, until you initiate the rollover from the 401k.   You may need to let bank #2 know to not close the account so they don't do it automatically.  

And you should do the new (correct) rollover as a direct transfer from the 401k to the IRA bank, with no money passing through your hands. 

It remains to be seen if you can correct this in a more simple way, once the other expert replies. 

[dmertz]

As it stands, you've actually made a $26k regular contribution to the Roth IRA and Vanguard classifying it as a rollover is incorrect, based on incorrect information provided by you to Vanguard.  You'll need to get Vanguard to correct the classification of the deposit.  To avoid an excess contribution penalty, the correction would have to be made as an explicit return of contribution, not as an ordinary distribution.

[Opus 17]

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@dmertz wrote:

As it stands, you've actually made a $26k regular contribution to the Roth IRA and Vanguard classifying it as a rollover is incorrect, based on incorrect information provided by you to Vanguard.  You'll need to get Vanguard to correct the classification of the deposit.  To avoid an excess contribution penalty, the correction would have to be made as an explicit return of contribution, not as an ordinary distribution.

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Yes.  If it wasn't clear, when I suggested "I think you can contact the new Roth IRA, say "it was all a mistake", withdraw the mistaken contribution..." I meant use the special procedure for return of mistaken contribution, and not a regular withdrawal. 

As it stands, if you have not done the actual 401k to Roth transaction (which seems to be the case), then you first need to withdraw the mistaken contribution using the special procedure, then do a proper rollover from the 401k.  As @dmertz  notes, Vanguard has the "mistaken contribution" incorrectly coded as a rollover, so that probably needs to be corrected with them before you do the withdrawal.