Roth Rollover problem

[cafoster123]

I see similar posts but not the exact same scenario.

In October 2021, I moved monies from two separate 401(k) retirement accounts.  I rolled over all Traditional IRA contents into a newly created Rollover IRA account at Fidelity and that apparently went smoothly.  TDAmeritrade told me what to do to move the ROTH monies, and had me set up a Rollover IRA account which I did.  I hand carried one check to fund the rollover account and the other was an ACH transfer.  Both posted the same day.  No additional monies have been deposited to this account since then, nor have any funds been removed.

I turn 73 late 2024, so I know I need to take RMD's from the traditional IRA starting this year, but I received notice that there is an RMD for the TDAmeritrade (now Schwab) account since apparently the initial account I created was not a ROTH IRA Rollover but instead was a traditional IRA rollover.

Schwab says they need me to get a tax professional to tell me how to fix, so it does not cause it to be a distribution resulting in a tax.  Schwab has created a new Rollover ROTH account to hold the funds once this is resolved.  They sugggested I may need to file 8606.

I tried local tax preparers, but they either don't do that, or won't return my calls.

I had a meeting with an IRS agent at my local office to address tax law and he says, I did nothing wrong, and this should be a paperwork error for TDAmeritrade/Schwab to fix with also issuing corrected 1099-R's and 5498.  He also said that 8606 IS NOT the correct form for this situation.

Even with this information Schwab is not able (or not willing) to change it yet.

I have talked to two separate Tax specialist at TurboTax, (one "tax expert" and one a CTA), and while one said I needed to file an amended 2021 return the other said there was nothing to amend since in 2021 I showed this as a Roth rollover on my Federal return.

Very long winded I know, but I am just trying to get this fixed.  I already paid taxes on all the monies when they went into a ROTH account over the years, and DO NOT feel I should have to pay taxes on this again, or the earnings on these monies.

[dmertz]

"TDAmeritrade told me what to do to move the ROTH monies, and had me set up a Rollover IRA account which I did."

As I understand it, this transaction in 2021 was intended to roll money from the designated Roth account in your 401(k) held as TDAmeritrade over to a Roth IRA held at TDAmeritrade, but it was instead deposited into a traditional (rollover) IRA at TDAmeritrade.  Because a traditional IRA is not eligible to receive a rollover from a Roth account, this constitutes an excess contribution to the traditional IRA.  The excess contribution is subject to penalties on your 2021, 2022 and 2023 tax returns.

While TDAmeritrade/Schwab might be able to correct this as a bookkeeping error and avoid this having been an excess contribution to a traditional IRA, if they can't, the corrective action necessary is to obtain a distribution from this traditional IRA equal to the amount deposited, then request that TDAmeritrade/Schwab accept these funds as a late rollover to a Roth IRA, pursuant to IRS Rev. Proc. 2020-46, of the original distribution from the designated Roth account in the 401(k), with the reason being financial institution error.  (Such a transaction performed entirely in house should never have been allowed to happen by TDAmeritrade.)

https://www.irs.gov/retirement-plans/accepting-late-rollover-contributions

[cafoster123]

You have it mostly right, but the initial ROTH funds came from two different custodians of the respective 401(k) account that I held - neither were TDAmeritrade. The first custodian sent me an overnight check that I immediately hand carried to TDAmeritrade, and in the second case the custodian did an ACH transfer directly to TDAmeritrade.   So this was not a totally "in house" issue.  They admit it shouldn't have happened, but I put the account number on the check for the transfer in, and I gave the account number to use for the ACH transfer.  I am sure that COVID had some bearing on it with limited staff to check things.

[dmertz]

In that case I'm not sure that you can blame TDAmeritrade since they relied on your input, and I'm not sure that this could be resolved as a bookkeeping issue.  For performing a late rollover under Rev. Proc. 2020-46, it would make sense to use a different reason:  the funds were deposited into and remained in an account that you mistakenly thought was an eligible retirement account.  You would still be subject to the 6% excess traditional IRA contribution penalty for three years.

[cafoster123]

I believe I could also take the position that I consulted TDAmeritrade, and they told me what I had to do to create the Rollover account, so yes it was a mistake from them.

Can you provide additional detail on the 6% tax (i,e, IRS regulation #)?

I ask because I see some references that it applies to end of year account values, and I see references to "timely correction" without an excise tax would have been Oct 15 of the year after the mistake was made, so October 15, 2022.  Also, if this is what needs to be done, what IRS form is used to document and track this.

If this is the solution, I am trying to understand why I couldn't get that response from the supposed Tax Experts employed by TurboTax.

Thanks for your help so far.

[dmertz]

Because the excess contribution to the traditional IRA was made in 2021 and we are long past October 15, 2022, an excess traditional IRA contribution now has to be corrected by making a distribution of exactly the amount of the excess.  In 2024 TurboTax you would enter the code 1 or code 7 Form 1099-R with the IRA/SEP/SIMPLE box marked by substituting a zero in box 2a rather than entering the reported box 2a amount (which would be the same as the box 1 amount).  This would cause TurboTax to prompt you to enter an explanation of a return of excess contribution after the due date of the 2021 tax return,  allowing TurboTax to treat it as a nontaxable distribution.

TurboTax employee experts are more experts on the operation of TurboTax than on the IRS guidance regarding this sort of transaction error that does not directly involve TurboTax.  I would guess that most CPAs are unfamiliar with this situation as well.  It relies on knowing several things:  that a traditional IRA is not an account eligible to receive a rollover from a Roth account, that the deposit into the traditional IRA is a failed rollover and therefore constitutes a regular contribution rather than a rollover contribution, how one goes about obtaining a distribution of the excess after the due date of the tax return, and how one might be able to complete the original rollover by self-certifying to the Roth IRA custodian that the situation would qualify for a waiver of the 60-day rollover deadline.

Note that the traditional IRA will still be subject to the RMD, which can be satisfied with a distribution of any amounts remaining in this traditional IRA (investment gains) or a distribution from another of your traditional IRAs.

[cafoster123]

So there is nothing to do with IRS tax filings until I file in 2024 - correct?

TDAmeritrade/Schwab will issue a 1099-R for the distribution that I will take during 2023.  So while the IRS will get a copy of the 1099-R from Schwab showing the distribution in boxes 1 and 2, you are saying that in TurboTax in my 2024 filing, I need to show $0 for box 2 instead of the actual amount that Schwab will show - CORRECT?

And in addition, since there was a designated RMD for this year, I still need to take it and the source can be either this troubled account (if enough money) or any other traditional IRA source.

So I assume depending on whether additional funds still exist after this, the remainder funds of the troubled account will forever be identified as Traditional IRA funds - CORRECT?

You have been very helpful, and I really do appreciate the assistance.

[dmertz]

"TDAmeritrade/Schwab will issue a 1099-R for the distribution that I will take during 2023."

I assume that you mean 2024.  We are several months past 2023.

Everything else is correct.

[cafoster123]

The only thing I didn't get clarified is the 6% annual excise tax.  Is there a form I need to fill out for the IRS so that I pay this now, or do I wait for the IRS to come to me with a required payment.

[cafoster123]

I think I found it.  Looks like it is IRS form 5329, but if I read it right, I would file that form with my 2024 tax return.

Can you confirm?

[dmertz · Accepted solution]

As an excess 2021 traditional IRA contribution, Forms 5329 would be needed for 2021, 2022, 2023 to pay the 6% penalty for each year and 2024 to report resolving the excess.