Rollover from Employer Based Retirement Account into Wrong Type of Account

[Toyo1]

Hello

Can someone please help me on how to file this properly?  Back in Aug 2022, I did a rollover of a previous employer's plan into a rollover IRA.  I receive my 1099-R and on line 7 I have a code of H and  on line 11 it says 1st year of desig. Roth Contrib. 2017 and also line 2 Total Distribution is X.  I call up the old employer's plan to verify if I had made after-tax dollar contributions to the plan and was told yes and they thought it was moved into a Roth as well.  Basically, the plan was moved into a regular IRA account when it should have been rolled over into a Roth IRA account.  I call the current brokerage account and they told me that I cannot do a recharacterization since it was a rollover and I am beyond the 60 days.  How do I file this dilemma? And how do I move the money now to a Roth IRA.  

Thank you

Al

[DianeW777]

You can create a Roth IRA however, not for 2022. The best recourse would be for your employer or plan administrator to reissue a corrected Form 1099-R.

The Form 1099-R has the wrong code for the actions that were taken by the plan administrator.  Since the money was actually rolled over to a Traditional IRA the code in Box 7 should be G.

• G—Direct rollover and direct payment - this is for Traditional IRA to Traditional IRA in a trustee to trustee transfer
• H—Direct rollover of a designated Roth account distribution to a Roth IRA.

Likewise Box 11 is not a true statement because a Roth IRA was never established.  

Here are the steps if you are unable to get a correction.

1. Gather all of your data together so you have the back up detail including the details from the brokerage. Keep this with your tax return should you need to explain later.
2. Change the code to G if this did not come through your hands (went directly to the broker from your employer plan)
   • This allows the money to be tax free in 2022 because it was actually rolled over to a Traditional IRA
3. File your return with the correct information. 
4. In 2023 you can roll the money into a Roth IRA at which time you will pay tax on the money you transfer.  
   • IRS FAQs - See How do I convert my Traditional IRA to a Roth IRA?

[Toyo1]

So the code is correct when I called the previous employer but where the money went was the wrong account. I already paid taxes on that money because it was contributions with after tax dollars. There is also a dollar figure in line 6 which is greater than the amount in line 1. I have a Roth IRA already for many years in the same brokerage the rollover came in. The problem is that the rollover went into the wrong account and was told that a tax advisor would be able to help since we can not do a recharacterization. Anything else I can do?

[dmertz · Accepted solution]

Changing the code-H Form 1099-R is not an option.

This is a serious error because this distribution from the designated Roth account was not eligible for rollover to a traditional IRA.  The deposit is a failed rollover and therefore constitutes a regular excess contribution to the traditional IRA, subject to penalty unless corrected.  The brokerage was clearly not very helpful in suggesting that this could be resolved by a tax advisor.

The excess contribution must be returned to you from the traditional IRA by the due date of your tax return, including extensions.  I would certainly request a filing extension by April 18, 2023 to ensure that that deadline is extended.  You'll need to convince the brokerage that this is indeed an excess regular contribution that is eligible for return.  In processing a return of contribution, the custodian should calculate the net income attributable to the excess contribution and distribute the adjusted amount to you.

As for getting the money into the Roth IRA, you need to get the brokerage (or any other Roth IRA custodian) to accept self-certification under IRS Rev. Proc. 2020-46 (reason 3.02(a), financial institution error, and 3.02(c), the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan, would seem to apply) that these circumstances would qualify for a waiver of the 60-day rollover deadline to allow the rollover to the Roth IRA of the original amount distributed from the designated Roth account in the employer plan:  https://www.irs.gov/pub/irs-drop/rp-20-46.pdf

Once all of this is done, you'll be able to report the code-H Form 1099-R as properly indicating a rollover to a Roth IRA (despite the fact that the rollover became an indirect rollover).  If there are any investment gains attributable to the excess contribution to the traditional IRA, the gains will be taxable on your 2022 tax return but you will not receive the code-P Form 1099-R reporting this until the end of January 2024.  Whether there is a gain or a loss, you'll need to include an explanation statement with your 2022 tax return describing the return of contribution.

If this was a new traditional IRA account containing nothing but this excess contribution and it's attributable net income, the custodian will not have to do any special calculation to determine the net income attributable to the contribution being returned and will simply distribute the entire balance of the account.  The distribution should not be done as a regular contribution.  (Additional steps involving another Roth IRA custodian might be necessary if the brokerage currently holding the accounts is uncooperative.)

[Toyo1]

Thank you! I have contacted the brokerage and filled out the form for excess contribution and am currently being processed.  According to them, they will issue a check and that I have 60 days to redeposit it back into the Roth IRA.  So, I'm glad that I did not purchase securities with the funds it had remained inside a interest bearing account within so earnings are very minimal.  Do I have to wait for a new form to file my 2022 taxes?  You also mentioned that I need to make a note, where on the tax form should I make a note of the error?  Thank you again for your assistance.

[dmertz]

You won't get the Form 1099-R until January 2024.  You should file your 2022 tax return before then, but I would at least request a filing extension so that you can file after the amount distributed to you is known.

"According to them, they will issue a check and that I have 60 days to redeposit it back into the Roth IRA."

This is wrong information.  The return of excess contribution itself is not eligible for rollover.  You will instead be rolling over the original distribution from the Roth 401(k).  However, the normal 60-day deadline to roll over the distribution from the Roth 401(k) has long since passed, so your rollover needs to be done by the financial institution accepting self-certification under IRS Rev. Proc. 2020-46 that the rollover of the amount originally distributed from the Roth 401(k) (not the adjusted amount distributed to you from the traditional IRA as a return of excess contribution) would qualify for a waiver of the 60-day deadline as measured from the date of the August 2022 distribution from the Roth 401(k).  I described that above.

[Toyo1]

I will call them and see if they can do the transfer internally but just an FYI when I did fill out the request for the excess contribution.  It had asked me what the amount was and I did match the same dollar amount from back in August and also requested for 0% federal and state withholding.  The form also asked if I would like for the institution to make the calculation of the earnings on the distribution amount.  I'll give you a follow up on the phone conversation.  Thank you again for your time and assistance.  

[Toyo1]

I spoke with them, they are currently working on it to try and get it done internally. They will let me know tomorrow if it can be done but they did mention of 5498 tax form that I would be receiving from them later on in the year.  Once I hear back I'll repost.  Is there anything else that I should be requesting?

Thanks

[RobertB4444]

No, @dmertz has you all set.  Sit tight and make sure they handle this.

@Toyo1 

[Toyo1]

I finally spoke with someone with the knowledge and know how in the accepting financial institution.  The are familiar with the IRS code you had referenced for a waiver of the 60 day rule but since it has been over the 6 months it can not be done.  They had asked what IRS code could they use on their part if it were able to be done internally since the time has passed and such a long time?  They would normally give an exception to the rule if it were only a couple of days but since it has been months the only procedure is to remove the money in excess and then I could place it into the Roth IRA after receiving it.  As far as the money received from the excess, I would end up paying taxes on it based on the IRS calculations plus penalty since it was early distribution.  Then I would receive a new 1099-R from them in January of 2024 in which I would have to report it to the IRS.  He did mention that when reporting excess removal to reference 8606 instructions but not necessarily use the 8606 form.  They were willing to talk to an accountant or CPA which was nice, but at this point the company procedure for them is to do an excess contribution.  I read word for word on what you had written and they understood it but due to time frame.  Unless you have a IRS code of some sort on how the institution would report this internal transfer?

Anyways, lesson learned before doing a rollover confirm that the money is before or after tax dollar so that you know which type of account to place it in.  Just for reference, the old plan was a 403(B) but I had the option to use after-tax dollar funds to fund it.  I'm grateful that is was a small amount of money only under 2k but the calculation for the IRS I was told was based on the whole IRA account and then pro-rated and not just the money that came in.  He also mentioned that I don't need to move the money over to the Roth IRA if I don't  want to but I would need to keep track of the cost basis if I kept it in there.  But then that defeats the whole tax-free at retirement and RMDs.  I do not wish this on anyone, it is going to be fun trying to file this (so I may have to spend the money to avoid the additional headaches.) To be continued.....?  I would like to thank you for all the assistance and knowledge you have passed on to me and to others. 

[dmertz]

"since it has been over the 6 months it can not be done. "

There is no definite time limit imposed by the IRS.  Section 3.02(3) of Rev. Proc. 2020-46 says:

(3) Contribution as soon as practicable; 30-day safe harbor. The contribution must be made to the plan or IRA as soon as practicable after the reason or reasons listed in the preceding paragraph no longer prevent the taxpayer from rolling over the amount distributed (which includes any amount withheld for income tax) or a lesser amount if the taxpayer wants to roll over less than the total amount distributed or if part of the amount distributed is ineligible for rollover. This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason or reasons no longer prevent the taxpayer from making the contribution.

I would not consider it practicable to complete the rollover of the funds from the designated Roth account to the Roth IRA until the funds had been distributed from the traditional IRA account where they should not have been deposited.  30 days is a safe harbor, but there is no definite time limit.

[Toyo1]

Ok....I will call him tomorrow and try again but this time I will include, "to accept self-certification under IRS Rev. Proc. 2020-46 (reason 3.02(a), financial institution error, and 3.02(c), the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan" as a code for the institution.  Basically, if they did transfer it internally they would still need to do the calculations on the gain since the IRA has additional  funds and was established before this rollover.  The person assisting me is probably also confused or has never done it this way hence the reason why he is asking me how they would file that internally as a brokerage or report it to the IRS is my assumption.  But he did mention that is how they resolved it with another client by requesting an excess distribution and then putting it into the Roth.  But your logic makes a lot more sense since I would not necessarily be rolling over excess funds.  I will retry again and file for the extension.  I will give you a follow up but in the meantime are you for hire to help explain this to him?  Thanks again.

[dmertz]

The gain calculation only applies to the return of contribution from the traditional IRA.  The amount to roll over late to the Roth IRA is the exact amount distributed from the designated Roth account in the employer plan, regardless of the adjusted amount distributed from the traditional IRA.  Treat the return of contribution from the traditional IRA and the completion of the rollover from the designated Roth account in the employer plan as entirely independent transactions.  In fact, if you had a source of funds to do so, the completion of the rollover of the distribution from the designated Roth account can occur before the return of contribution from the traditional IRA.

[Toyo1]

Update.....The brokerage company was able to do an internal transfer.  They had called it a redeposit so if you are looking for the terminology to use instead of a return of excess contribution (which is incorrect due to what dmertz had explained above.).   Also, with the tax codes that dmertz had highlighted helped push this internally.  The transaction history in my IRA now reflects an error in deposit also removed the interest earned on that money.  The transaction history in my Roth IRA reflects a rollover deposit with a backdate of Aug 22, 2022.  I also, asked about the tax form that I should be receiving from them in May which is tax form 5498 on how it would reflect.  They will be issuing a 5498 with box 2 filled out where a rollover credited to a Roth IRA backdated to Aug. 2022.  

I'm assuming everything is good now?  Do I still need to file the extension?  If so, I am filing the extension just to see what 5498 they send to me?  Please explain further.

I would like to say thank you very much to dmertz for all your assistance and knowledge on this topic.  I believe this will help many other who face this challenge.  Thank you for your patience and persistency in pushing me to stay on top of the brokerage to push the internal transfer.  Thank you for the IRS code AND reasons on why self certification is necessary and NOT a return of excess contribution.

Thanks

[dmertz]

This sounds like the best possible outcome.

You should be able to file now as if the rollover had originally been deposited into the Roth IRA.  Just make sure that you file your tax return by April 18 if you do not request a filing extension by then.