Rolled over Roth 401K into Traditional IRA

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Topic Author
MM0819
Posts: 2
Joined: Mon May 03, 2021 11:08 am

Rolled over Roth 401K into Traditional IRA

Post by MM0819 »

Hi Boggleheads,

On March 2020 my husband moved his 401K (which consisted of 49K TIRA & 43K ROTH) to a
Vanguard retirement account as a rollover. The previous bank sent him one check for 92K.
As soon as he got the check he sent it to Vanguard for deposit. The check did not specify Roth or Tira, and
my husband did not understand there was a difference. The bank did send 2 email letters for the Tira and Roth, which he did
not read.
Fast forward to Feb. 2020 and we get 2 1099r one for 49K and another for 43K for Tira and Roth accounts.
0 Taxable amount,0 withheld, Total distributions, code G for Tira and code BG for Roth.

We called Vanguard to ask why they were showing everything as one account. They said that we did not specify nor the check they received.
As far as what to do they said we could get excess money out as a distribution or seek advice from our financial advisor.

And to make things more complicated we filed our taxes and forgot to include the 1099r, so now we need to amend.

I appreciated any advice on this, thanks!
Alan S.
Posts: 10591
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Rolled over Roth 401K into Traditional IRA

Post by Alan S. »

MM0819 wrote: Mon May 03, 2021 1:33 pm Hi Boggleheads,

On March 2020 my husband moved his 401K (which consisted of 49K TIRA & 43K ROTH) to a
Vanguard retirement account as a rollover. The previous bank sent him one check for 92K.
As soon as he got the check he sent it to Vanguard for deposit. The check did not specify Roth or Tira, and
my husband did not understand there was a difference. The bank did send 2 email letters for the Tira and Roth, which he did
not read.
Fast forward to Feb. 2020 and we get 2 1099r one for 49K and another for 43K for Tira and Roth accounts.
0 Taxable amount,0 withheld, Total distributions, code G for Tira and code BG for Roth.

We called Vanguard to ask why they were showing everything as one account. They said that we did not specify nor the check they received.
As far as what to do they said we could get excess money out as a distribution or seek advice from our financial advisor.

And to make things more complicated we filed our taxes and forgot to include the 1099r, so now we need to amend.

I appreciated any advice on this, thanks!
Of all the rollover errors possible, this one is about the worst. And it sounds like all parties contributed to this error, which makes it unlikely to expect that VG will step in and reconstruct the rollover. That's when IRA custodians usually come up with the advice to see your financial advisor.

The 401k administrator would have coded the Roth 401k distribution with Code H for a direct rollover to a Roth IRA. Code BG only applies for a direct rollover to another Roth 401k plan. So it's not clear what paperwork they were looking at when they processed these rollovers. You did not indicate what the e mails contained.

How to fix this? First, a distribution from a Roth 401k is not eligible to be rolled to a TIRA account, so this created an excess TIRA contribution which must be treated as an excess regular IRA contribution and removed with earnings. The earnings will be taxable in 2020 and subject to penalty if under 59.5.

The next fork in the road is what to with this portion of the distribution.
1) If nothing can be done, it must be reported as a taxable distribution on a 2020 amended return. The taxable portion will be any earnings included in the 43k. See if there is any amount in Box 5 of the BG coded 1099R. If so, that amount is what he contributed and would not be taxable, just the amount in excess of the Box 5 amount. If nothing in Box 5, then any Roth 401k statements could be checked, or the plan administrator could be called.

2) An option to consider is RR 2020-46: https://benefitslink.com/src/irs/rp-20-46.pdf
Reasons 1 or 3 could be used. This might allow the Roth distribution to be rolled into his Roth IRA after all, because it extends the 60 day rollover period. Read the entire link - as you can see this will require cooperation from Vanguard to accept his certification for late rollover. Try to work with a VG retirement specialist on this since the average CSR will be clueless. So VG would have to accept the completed certification, and once they do the excess TIRA contribution could be returned and 43k of that money could be accepted by VG into the Roth IRA as a (very late) rollover contribution. VG will probably want some evidence that this 43k was actually Roth 401k money, and a copy of the BG coded 1099R should suffice. Since VG has not yet issued Form 5498 reporting IRA contributions for 2020 (deadline is end of June) perhaps they will recode the rollovers to show the correct split between the TIRA rollover and Roth rollover.

If VG will not cooperate, it will be nearly impossible to work with another IRA custodian to accept the certification, so he would be stuck with the first option above. The Roth funds would no longer be in an IRA. Again, they cannot remain in the TIRA since they are excess TIRA contributions, and the annual 6% potential excise taxes never end.

The 2020 tax return will have to be amended once this is resolved, one way or another. Some additional taxes are expected, varying by whether solution 1 or 2 is used. The certification form is not hard to complete, the challenge is getting VG to cooperate and accept it and the late rollover. When you reach a retirement plan specialist at VG, first ask if they are familiar with self certifications for late rollovers, and if they are not, ask for someone who is.

This is complex, so if any questions, please post.
Topic Author
MM0819
Posts: 2
Joined: Mon May 03, 2021 11:08 am

Re: Rolled over Roth 401K into Traditional IRA

Post by MM0819 »

First of all thank you for taking the time to explain, it means alot to us.

Yes box 5 is $28,722.
So that means will be be taxed on the difference of that right? do you know at what rate?
Alan S.
Posts: 10591
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Rolled over Roth 401K into Traditional IRA

Post by Alan S. »

MM0819 wrote: Tue May 04, 2021 2:49 pm First of all thank you for taking the time to explain, it means alot to us.

Yes box 5 is $28,722.
So that means will be be taxed on the difference of that right? do you know at what rate?
Yes, the taxable amount would be Box 1 less Box 5, so about 14,000+. This would also be subject to the 10% penalty unless he is 59.5 or separated from the employer at 55 or later.

Another long shot possibility comes to mind. If he qualifies for a corona virus related distribution (CRD) per Notice 2020-50, the Roth 401k distribution could be reported as a CRD, potentially taxable over 3 years, but more importantly he could repay (rollover) all or part of the distribution to a Roth IRA, and any portion not repaid would be exempt from penalty. This would be reported on Form 8915 E.

Here is Notice 2020-50. It is broader than you might think, so check if he might qualify: https://www.irs.gov/pub/irs-drop/n-20-50.pdf

If not, there is also the possibility of the delayed rollover deadline per link posted earlier.

Finally, if the distribution ends up taxable, the rate would likely be your marginal federal and state rates which depends on your joint taxable income and deductions.
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