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Rollover from Employer Based Retirement Account into Wrong Type of Account

Forum|Forum|3 years ago
March 17, 2023
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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

Best answer by dmertz

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.)

D

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.

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.
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
File your return with the correct information.
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?

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T

Toyo1Author

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?

D

dmertzAnswer

Employee

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.)