Realized an accidental online transfer of 401K rollover into a regular brokerage account (Complete mistake)

[AWholeLotOfTaxes]

Hello Community,

I wonder if I can get support.

I realized today after nearly a year that monies from a Traditional IRA I had opened at Wells Fargo has rolled over into a regular brokerage account I opened at Interactive brokers (completely by fault) when I had intended it to set up a traditional IRA account.

I am very upset about this and wonder if there is any recourse about this. We're talking ~75K in rollover monies that flew into a brokerage account using ACATS transfer from Wells Fargo Advisors (Brokerage) to Interactive Brokers.

I have not received a 1099-R for it but wonder if I can approach the IRS or Wells Fargo or anything else.

Appreciate all the support.

[dmertz]

The Form 1099-R for this transaction will be issued to you by Wells Fargo by January 31, 2024 unless Wells Fargo believed that this was a nonreportable trustee-to-trustee transfer.  Since it actually failed to be a nonreportable trustee-to-trustee transfer since the funds were move to a non-IRA account), if Wells Fargo does not issue a Form 1099-R you'll have to enter into TurboTax a substitute Form 1099-R to report the distribution.

Your only chance to correct this would be if you can convince an IRA custodian (probably Interactive Brokers since that's where the funds reside) to accept a late rollover to an IRA by taking advantage of reason 3.02(2)(c) of IRS Revenue Procedure 2020-46,  "the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan."  This would still be subject to the one-rollover-per-12-months limitation based on the date of the distribution from the Wells Fargo IRA.

https://www.irs.gov/pub/irs-drop/rp-20-46.pdf

[AWholeLotOfTaxes]

Thank you. I did reach out to Interactive Brokers and they've requested me to write something in email back to them. In the meanwhile, if there are any other suggestions you can provide, it will go a LONG way for me.

[AWholeLotOfTaxes]

Folks,

I wanted to come back and post the latest on all that has happened.

First off, I have gotten this corrected - THANK GOODNESS!!

To recap, I had funds from a Regular IRA transferred over to a Regular Brokerage account unknowingly.

For the rest of this post, we will call Bank A as the bank that allowed the transfer to occur and Bank B as the bank that received the monies into a newly opened regular brokerage account.

Bank A accepted the mistake and helped to review options. Bank B wasnt much help.

Since monies were transferred about a year ago, the original portfolio which was a mix of stocks and monies had been revised quite a bit where several underperforming assets had been sold off. Remember that all along, I believed that I was dealing with a regular IRA at Bank B.

Steps to fix :

Bank A sent Bank B an indeminification letter demanding recoupment of all funds back to the account it originated from.

Bank B complied.

Bank A worked through their Backoffice to revitalize corrections given that the underlying assets had changed and grown over that 1 year period.

In parallel, I opened a fresh Regular IRA back at Bank B.

I then initiated an ACATS transfer using the correct account at Bank B to initiate a full ACATS transfer from Bank A (which should have been the right way to do it).

In the meantime, I did receive a 1099 from Bank B and have requested that to be corrected. Will post when I have an update.

Lucky for all, Bank A has not issued a 1099-R distribution letter to the IRS.

Also, Bank A has been more than willing to support me all along for an event that should have never allowed to occur on part of Bank A.

All in all, things are looking sunny!

[Darkstalker]

Quick question. What happened to the capital gains on the original transfer? I had almost the same situation. They transferred my original rollover into an ira using the irs form but left over 8k in the brokerage account that was capital gains. 

[dmertz]

@Darkstalker , the treatment must be the same as for any indirect rollover.  Was it cash that was distributed from the 401(k) or was there an in-kind distribution of shares from the 401(k)?  If it was cash, the rollover must be complete with the same amount of cash and any investment activity in the brokerage account is irrelevant to the rollover.  If it was a distribution in-kind, the fact that capital gains remained in the brokerage account implies that the shares were sold in the brokerage account and the indirect rollover should have been completed by a rollover of an amount of cash equal to the cash proceeds from the sale of the  original shares regardless of the change in value of the shares between the time of the distribution from the 401(k) and the sale of those shares in the brokerage account.  If the cash was used for trading in the brokerage account, that results of that trading remain associated with the brokerage account and that trading has no effect on the amount required to be rolled over to the IRA to complete the indirect rollover.

If the rollover is a late rollover, the use of the cash from the 401(k) or the cash proceeds from the sale of shares distributed in-kind from the 401(k) for trading within the brokerage account might be considered an intervening use of the funds that could disqualify a late rollover, but generally the IRS leaves it up to the IRA custodian receiving the late rollover to make that determination as to whether to accept self-certification that the rollover would qualify for a waiver of the 60-day rollover deadline.

[Darkstalker]

I accidentally selected taxable brokerage account when I rolled over funds from previous employer to Schwab in October. I found out this April that I made a mistake. I called Schwab and self certified the late rollover ira form. They sold off shares to equal the original deposit amount and moved that portion to a IRA account. They left the excess in the intelligent portfolio brokerage account. 

[dmertz]

@Darkstalker , assuming that the distribution from the 401(k) was in cash, what Schwab did sounds correct.  You'll get a Form 1099-B reporting the capital gains on the shares that were sold in the brokerage account.  Your 2024 Form 5498 from the IRA should report a late rollover.  Your 2023 tax return should show that the distribution from the 401(k) was nontaxable, which will be accomplished by entering the 2023 Form 1099-R as received.

[Darkstalker]

Thank you. It was cash. So the money in the brokage account will be taxed as either short or long term capital gains when I sell it. Depending how long it's been in the account? 

[dmertz]

Yes.