Roth Rollover problem

Forum|Forum|2 years ago
March 20, 2024
1 reply
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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.

Not A Product Question

Best answer by dmertz

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?

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.

dmertz

Employee

"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

cafoster123Author

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

Employee

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.