Accidental Traditional IRA Rolloiver

Forum|Forum|1 year ago
August 3, 2024
4 replies
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Looking for some advice on this unfortunate situation. I took distributions from 3 different Prudential traditional IRA annuities with the intention of converting them to my Vanguard Roth IRA. These were indirect rollovers as the proceeds were deposited into my checking account. Rather than transferring the funds from my checking account bank to Vanguard, I wanted to use funds that were already available in my Vanguard after-tax brokerage account to complete the conversion. When I called Vanguard to do this yesterday, they said the easiest way to accomplish this was to transfer the conversion amount from my brokerage account into a traditional IRA account that I already had at Vanguard, and then convert the funds from that traditional IRA to my Vanguard Roth IRA account. They were able to process the transfer over the phone. It wasn't until this morning that I realized that there's a major problem with this approach. Only one indirect rollover is allowed by the IRS in any 12 month period, and this transaction would be considered 3 rollovers based on the IRS aggregation rule for indirect IRA rollovers. Had the transfer been made directly into my Roth account (which is what I had originally planned on doing!) I wouldn't have had a problem as Roth conversions are unlimited. I've yet to call Vanguard to address this (they're only open weekdays and today is a Saturday) but I'm wondering if anyone has any thoughts on how this can be resolved with no or minimal negative tax implications. The conversion amount is almost 6 figures so any negative tax implications could be significant. Can the transfer into my traditional Vanguard IRA be withdrawn as an excess contribution, or recharacterized as a Roth IRA conversion? I've got plenty of time before the 60 day indirect rollover window closes. Next time I convert to a Roth, I will go with a direct transfer to avoid any problems like this!

Thanks for any advice you can provide.

Best answer by dmertz

Are you saying that if the two withdrawals ineligible for rollover are removed as excess contributions, they would not be included as taxable income in the 1099R I receive from Vanguard? And that only any investment earnings associated with those funds would be taxed?

Correct. With a proper, explicit return of contribution, only investment gains that are attributable to the excess contribution that are required to accompany the returned contribution are taxable. If at the time of this distribution value of the account is less than or equal to what it was immediately following the deposit of the excess contribution, there will be no taxable gains to distribute. The returned contribution itself is not taxed.

Given the bad information from Vanguard that suggests inadequate training, make sure that they process a return of contribution that will be coded with code 8, not a regular distribution coded with code 1 or code 7.

VolvoGirl

Employee

I don’t know about your whole question but wouldn’t taking it from your brokerage account also involve a sale to report on 1099B? So that’s another taxable event.

macheungAuthor

The funds from my brokerage account were in a money market fund, so no tax implications. Thanks.

macheungAuthor

Just wanted to clarify that the funds are still sitting in my traditional Vanguard IRA and that the conversion to my Roth hasn't happened yet.

VolvoGirl

Employee

What’s happening to the first 3 distributions in your checking account? Those are 3 taxable distributions (even if you put them in the ROTH). Then if you do the conversion from the Vanguard IRA that will also be a taxable event making your tax DOUBLE! Plus the 1099B from the Brokerage account. Sounds like a big mess and you end up paying too much tax. @dmertz

macheungAuthor

If the IRS only recognizes 1 of the 3 distributions from the Prudential IRAs as a rollover to another traditional IRA, then yes, I'd be paying double taxes on the other 2 distributions if I were to convert them to a ROTH. And if I don't convert them to a ROTH then I (or my heirs) would be paying taxes on those 2 distributions again when they are finally withdrawn from my traditional Vanguard IRA. Either way, not a good outcome. The funds are in cash in my brokerage account so no capital gain/loss and no impact on my 1099B. I am really ticked off that Vanguard led me down this path and am hoping that they can fix things. I am also mad that I let myself get into this predicament.

VolvoGirl

Employee

I keep re reading your post. Yes the contribution from Brokerage to IRA is definitely an excess contribution. You can’t do that. Weird they would even suggest that to you.

Plus another wrinkle is if you are under 59 1/2 and if some of the amounts taken out are considered a distribution and not a conversion there is a 10% Early Withdrawal Penalty.

Here’s an idea…….You may have to start completely over and put the 3 annuity distributions Back into the annuity IRA accounts (if you can). You have 60 day to roll them back.

macheungAuthor

Vanguard said the transfer of funds from my brokerage account into my traditional IRA would be treated as a rollover of the Prudential IRA distributions, not a contribution.

I'm 70 years old, so no early withdrawal penalty.

Rolling the original withdrawals back into the annuity IRAs won't work as the 1 rollover per 12 months rule also applies to rollovers back into the IRAs from which they came. Thanks for the suggestion anyway.