Rollover IRA & Roth IRA

[PJCinAK]

In March of 2021 I rolled over an old employer IRA Company 1 with $5000  in Reg IRA and  $10,000 in Roth IRA.  These were supposed to go into matching accounts in a new Fund Company.  The new Fund company switched the amounts and put the $5000 into the Roth and the $10,000 into the Reg IRA.  This was found out when I received the 1099R from Company 1.  Any advice what we need to report this year and how to correct it later?  What will be the tax penalty if any?

[DanaB27]

To clarify, did the company say they will correct the issue and issue corrected Forms 1099-R? The funds going to the Roth IRA were after-tax funds? If yes, the rollover and the conversion of after-tax funds would not be taxable, so there shouldn't be a penalty. 

[PJCinAK]

Thanks, DanaB27: Company 1 from their perspective reported it correctly on the 1099R, the amounts and the IRA designation, so really the 1099R has what it supposed to be, company 1 did not have control over the funds after they sent them out, its the company that deposited the rollover that made the mistake. So why should they correct it?  Company 2 said they would move over the corrected amount from reg IRA to Roth, but to see first what we needed to do for tax reporting.    What would I need to report on taxes and how?

[DanaB27]

Sorry for the misunderstanding. If the second company will fix the error then you can use Form 1099-R from company 1 to enter the transaction into TurboTax.

You might have to split the Form 1099-R and enter two Form 1099-Rs, one for the rollover and one for the conversion,  for TurboTax to handle this situation.

1. Click on "Search" on the top right and type “1099-R”
2. Click on “Jump to 1099-R”
3. Enter the first 1099-R for the rollover into the traditional IRA:
   1. Box 1 Enter amount send to traditional IRA
   2. Box 2b check
   3. Box 5 blank
4. On the "Did you move this money from a 401(k) to a Roth 401(k)?" screen answer "No"
5. On the "Did you move the money to a Roth IRA?" screen answer "No"
6. Enter a second 1099-R for the conversion to Roth IRA:
   1. Box 1 Enter amount send to Roth IRA
   2. Box 2b check
   3. Box 5 enter amount listed on Form 1099-R
7. On the "Did you move this money from a 401(k) to a Roth 401(k)?" screen answer "No"
8. On the "Did you move the money to a Roth IRA?" screen answer "Yes"

The second company will have to move the funds and associated earnings to the Roth as if never made to the traditional IRA since they made the error.

[PJCinAK]

They did send me two 1099R one for each IRA, so each has its own, but I see what you are doing in the reply. What would I need to do next year as it gets corrected in 2022?  

Will that end up creating a taxable event then?

[DanaB27]

It should not create a taxable event since the 2nd company made an internal mistake that they need to fix. The first company and you gave a the right instructions they messed up.

You shouldn't have to report anything in 2022.

[PJCinAK]

They indicated they would move the difference between the two, so they would need to move $5000 from the IRA to Roth plus any earnings on the whole 10,000 plus any earnings made in the reg IRA would need to be moved to roth?? Would that work?

[DanaB27]

Yes, that would be correct but it would be easier if they only move the $5,000 and the earnings on these $5,000 from the reg. IRA to Roth IRA, which would fix the internal error they made.

[PJCinAK]

Okay I see what you are saying!  Thanks for the help.

[PJCinAK]

Thanks, DanaB27 for your help so far! Now the financial company that made the mistake wants us to fill out a "recharacterization" form requesting the amount to be moved.  I think this will put us into an income event with the IRS.  Your thoughts?

[DanaB27]

No, recharacterizations are not taxable. But these were not contributions and you are not allowed to recharacterize rollover or conversion to a Roth IRA therefore I don't believe the form would apply in your situation.

@PJCinAK

[PJCinAK]

Do you think they can just do a simple transfer from the Reg IRA account to the Roth?  The difference and the earnings?  Can it just be that simple??