Rollover IRA accident

Forum|Forum|3 years ago
August 10, 2022
11 replies
96 views

Hi,

I am getting married this year and my bride and I both had 401k's from previous companies. I wanted to get everything figured out and consolidated. So I opened a rollover IRA and deposited her 401k into my rollover. She only had 2k in her 401k from her previous employer. Then I find out that I needed her to open her own rollover IRA and shouldn't deposit her funds into mine. It does not exceed my max contribution. This was a mistake and I am wondering if I have to file Request a Recharacterization form and have her open her own account. I understand she should probably have her own anyways, but I really would prefer not to file this form anyways if it wont affect my taxes.

Best,

Not A Product Question

Opus 17

Level 15

As you have learned, 401k and IRA funds are individual and belong to one person only, and funds from more than one person can never be combined, even if they are spouses.

As of now, if you don't change anything, what you have is a withdrawal from your spouse's plan, that is taxable income plus a 10% penalty for early withdrawal (assuming your spouse is under age 55). Then, you have a $2000 deposit into an IRA in your own name, which might be tax deductible depending on your employment situation and other income.

You have the option of withdrawing contributions from your own IRA up to the tax filing deadline, if this happened in 2022, then you have until April 15, 2023 to withdraw the funds. Simply tell the IRA bank that you made a mistake and want to withdraw the funds, it's not a recharacterization. If you have gains (growth) from the mistaken contribution, you also must withdraw those gains, and the gains will be taxable plus the 10% early withdrawal penalty.

However, if more than 60 days have passed since the 401k withdrawal, you can't re-deposit the funds into an IRA in your spouse's name and call it a tax-free rollover, so your spouse will still pay income tax plus the 10% penalty on the withdrawal.

If you are eligible to contribute $2K to your own IRA, then I would probably leave things as-is. The tax deduction on your $2K IRA contribution will offset the income tax on your spouse's $2K withdrawal, and you will be left with the 10% penalty, but there is no way to avoid that. Then separately, your spouse can open an IRA in their own name and make tax-deductible contributions so you each have separate retirement funds. If your spouse doesn't have compensation from working, she can still make IRA contributions by relying on your compensation. (Note that all IRA contributions are subject to rules based on income and employment status that you must follow.)

NCperson

Level 15

@Blake13 -did she cash out her 401(k),receice a check, deposit it in bank and then you sent a new check (presumably with your name on it) and deposit it into your IRA?

or was a check issued by her administrator and that check was presented to the incoming adninistrator of the IRA...

it may make a difference on how you approach this.

Also, are you still within 60 days from the time the money came out of her 401(k)?

Opus 17

Level 15

@NCperson wrote:

@Blake13 -did she cash out her 401(k),receice a check, deposit it in bank and then you sent a new check (presumably with your name on it) and deposit it into your IRA?

or was a check issued by her administrator and that check was presented to the incoming adninistrator of the IRA...

it may make a difference on how you approach this.

Also, are you still within 60 days from the time the money came out of her 401(k)?

In my answer I assumed the taxpayer received the funds themselves. I would trust that either the sending plan or the receiving plan would figure out that sending money from a 401k for Jane Doe 556-77-8899 to an IRA for John Smith 123-88-9999 was not permitted and block any direct transfer.

NCperson

Level 15

@Opus 17

<< I would trust that either the sending plan or the receiving plan would figure out that sending money from a 401k for Jane Doe 556-77-8899 to an IRA for John Smith 123-88-9999 was not permitted and block any direct transfer.>>

one would think this couldn't occur but I thought I'd ask in case the receiving trustee screwed up....and that would change the recommendation on how to fix this.