Confounding 401k rollover mistake!

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muel87
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Confounding 401k rollover mistake!

Post by muel87 »

So, last year we accidentally rolled over my wife's Roth 401k balance into a traditional IRA. Not allowed. However, I subsequently rolled in another 401k (traditional this time, from a different employer) into that IRA account. I then rolled everything from that IRA into her solo 401k, creating a zero balance (for purposes of future Roth conversions, which then did as well). So the account today has zero balance. Does anyone know how I would correct such a thing? Vanguard cannot figure it out, recommended I talk to a tax advisor, but Im doing my own taxes this year.

Has anyone accidentally rolled a Roth 401k into a trad IRA? How did you fix that?
Has anyone fixed that after subsequently rolling the money out of that trad IRA? How?
ADD: I also discovered that Roth conversion led to IRA basis being rolled over (not allowed) as well, along with the first improper rollover amount....

Thanks!

Note: the current solo 401k (where the Roth funds lie) is a self directed one with funds held in a VRIP brokerage account at Vanguard. Vanguard doesnt do tax reporting on this account or classify it as pre-tax/Roth, it's up to me to keep track and submit my own 1099-R (which my plan administrator assists with) and end of year 5500-EZ/SF (for over $250k in total value).

EDIT: Thanks to Alan G's generous help, this has been solved. Corrected two disallowed rollovers (including one of IRA basis) and got the money back where it belonged, the Roth IRA. Learned a ton. Happy to help anyone in a similar situation.
Last edited by muel87 on Wed Mar 29, 2023 8:03 pm, edited 5 times in total.
sailaway
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Re: Confounding 401k rollover mistake!

Post by sailaway »

Does the current solo 401k have a Roth option? Is that also at Vanguard?
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muel87
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Re: Confounding 401k rollover mistake!

Post by muel87 »

sailaway wrote: Tue Mar 14, 2023 10:41 am Does the current solo 401k have a Roth option? Is that also at Vanguard?
The current solo 401k is a self directed one with funds held in a VRIP brokerage account at Vanguard (they dont classify it or issue tax forms for it, I have to keep all the records. VRIP is what they call those type of accounts). That account has rollovers from several 401ks as well as trad IRA funds, all of it pre-tax (except for my $5,500 Roth rollover that is now all mixed in...)
tibbitts
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Re: Confounding 401k rollover mistake!

Post by tibbitts »

I don't know the answer to your question and am not an expert. I did have a somewhat similar problem of my own making with my own self-employment pension plan at Vanguard many, many years ago. Back then Vanguard had someone who seemed to have substantial expertise in dealing with the exact situation I had. He cited similar cases from tax courts and explained that in my situation there was actually no way to correct my problem that had been accepted in every case, but - while making the point that he wasn't giving me legal advice - explained in detail what he would do in a similar situation based on the highest probability of success. It was a very specific sequence of operations that I never would have come up with on my own. It wouldn't surprise me if Vanguard wouldn't have that discussion with you today so I think you're going to have to get similar advice, whether it's from someone here who has specific experience with your situation, or from someone you pay for that.
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Nate79
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Re: Confounding 401k rollover mistake!

Post by Nate79 »

Wow. You might want to message Alan S. to comment on your question.
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muel87
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Re: Confounding 401k rollover mistake!

Post by muel87 »

Nate79 wrote: Tue Mar 14, 2023 11:40 am Wow. You might want to message Alan S. to comment on your question.
Tried to message him, not sure if it's sending. Vanguard called me back to tell me to ask a tax consultant / CPA.
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Re: Confounding 401k rollover mistake!

Post by tibbitts »

muel87 wrote: Tue Mar 14, 2023 3:16 pm
Nate79 wrote: Tue Mar 14, 2023 11:40 am Wow. You might want to message Alan S. to comment on your question.
Tried to message him, not sure if it's sending. Vanguard called me back to tell me to ask a tax consultant / CPA.
I would expect Vanguard to reply that way today vs. the borderline legal advice I received from them over two decades ago. And realistically the people who will be able to answer your question best are incredibly busy at this time of year.
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cowdogman
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Re: Confounding 401k rollover mistake!

Post by cowdogman »

Here is Alan S (I think) from a few years ago on a similar issue:

https://www.irahelp.com/forum-post/3613 ... ow-correct

Also see:

https://www.irahelp.com/forum-post/1194 ... tional-ira

And:

https://www.irahelp.com/forum-post/6383 ... tional-ira

I found these by Googling "accidentally rolled a Roth 401k into a trad IRA".
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muel87
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Re: Confounding 401k rollover mistake!

Post by muel87 »

cowdogman wrote: Tue Mar 14, 2023 4:08 pm Here is Alan S (I think) from a few years ago on a similar issue:

https://www.irahelp.com/forum-post/3613 ... ow-correct

Also see:

https://www.irahelp.com/forum-post/1194 ... tional-ira

And:

https://www.irahelp.com/forum-post/6383 ... tional-ira

I found these by Googling "accidentally rolled a Roth 401k into a trad IRA".
I am going to call Vanguard again and get them to play ball. Here is my plan:
1. Rollover money back from my solo 401k trust into my IRA.
2. Have them return the contribution as an excess contribution. I don think there are much earnings, if any. I compared the share price of BND (the investment) that day (9/20/22) and it's gone up $.04. Maybe pay 10% penalty on those earnings.
3. Apply for Rev. Proc. 2016-47 Waiver of 60-Day Rollover Requirement, to make a contribution to the Roth IRA.
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cowdogman
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Re: Confounding 401k rollover mistake!

Post by cowdogman »

muel87 wrote: Tue Mar 14, 2023 7:43 pm
cowdogman wrote: Tue Mar 14, 2023 4:08 pm Here is Alan S (I think) from a few years ago on a similar issue:

https://www.irahelp.com/forum-post/3613 ... ow-correct

Also see:

https://www.irahelp.com/forum-post/1194 ... tional-ira

And:

https://www.irahelp.com/forum-post/6383 ... tional-ira

I found these by Googling "accidentally rolled a Roth 401k into a trad IRA".
I am going to call Vanguard again and get them to play ball. Here is my plan:
1. Rollover money back from my solo 401k trust into my IRA.
2. Have them return the contribution as an excess contribution. I don think there are much earnings, if any. I compared the share price of BND (the investment) that day (9/20/22) and it's gone up $.04. Maybe pay 10% penalty on those earnings.
3. Apply for Rev. Proc. 2016-47 Waiver of 60-Day Rollover Requirement, to make a contribution to the Roth IRA.
I'm not an expert, but here's what I would explore:

1. Treat Roth contribution to 401(k) as excess contribution and ask Vanguard to return it.

2. Take the cash returned and either (a) treat it as a distribution from your Roth IRA or (b) re-deposit it to the Roth IRA as a rollover.

1 and 2(b) restore the status quo ante, but are very probably not expressly permissible (without waiver) and may not line up with your 1099s.

I'm not sure why you want to "Rollover money back from my solo 401k trust into my IRA." I explored that move several years ago with Vanguard and was told "not possible--our computer system not up to the task."

Good luck.
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muel87
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Re: Confounding 401k rollover mistake!

Post by muel87 »

cowdogman wrote: Tue Mar 14, 2023 7:56 pm
I'm not an expert, but here's what I would explore:

1. Treat Roth contribution to 401(k) as excess contribution and ask Vanguard to return it.

2. Take the cash returned and either (a) treat it as a distribution from your Roth IRA or (b) re-deposit it to the Roth IRA as a rollover.

1 and 2(b) restore the status quo ante, but are very probably not expressly permissible (without waiver) and may not line up with your 1099s.

I'm not sure why you want to "Rollover money back from my solo 401k trust into my IRA." I explored that move several years ago with Vanguard and was told "not possible--our computer system not up to the task."
The issue is that there is no money in my tIRA. I rolled it all over into the solo 401k. They already said that they would return it as excess, but theres nothing to return. Was your solo 401k a Vanguard one? Mine is self directed meaning I can pretty much do whatever I want with the money.
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muel87
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Re: Confounding 401k rollover mistake!

Post by muel87 »

Vanguard can help me remove the amount from my self-directed 401k VRIP account there as an excess contribution. However, this will lead to this year's 5498 for the IRA being incorrect. It will show that rollover as a contribution to the IRA, which shouldnt have been allowed. What will the impact of this be? Do I need to correct them or can I even correct them?

Here's my new plan after talking w/ Vanguard:
1. Calculate the total earnings since it first rolled over into the IRA. I kept the same holdings, but apparently the calculation used to determine the earnings is based on the growth of the entire account, not just that holding. So if I rolled money into an IRA and kept it as a MMA, but I also had a high-growth stock fund in that IRA, and it earned a lot, my earnings on that small portion would be based on that, not just the earnings of the MMA. Does this sound right? '

2. Remove it from the VRIP/solo 401k as an excess contribution. Transfer it to bank account. Generate my own 1099-R.
3. Initiate a rollover from bank account to Roth IRA. 5498 is generated as a rollover contribution.

Im wondering if the 5498 for the original, incorrect rollover will create any problems down the line.

Also, I made a Roth IRA conversion last year. When determining my end of year balance for purposes of pro-rata calculation, that balance includes this excess contribution. Can I take it out of that calculation and how? Can the IRS help with these type of questions?
Last edited by muel87 on Wed Mar 15, 2023 9:29 am, edited 1 time in total.
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Kenkat
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Re: Confounding 401k rollover mistake!

Post by Kenkat »

One thing I will point out if you don’t know and that I recently learned helping my son roll over a Roth 401(k). If there is any employer match money, that actually needs to be rolled over to a traditional rollover IRA unless you want to do a Roth conversion and pay taxes on the rollover amount. The employee sourced money can go to a Roth IRA rollover. So if yo rollover a Roth 401(k), you would potentially have two rollover accounts, one Roth and one traditional.
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Re: Confounding 401k rollover mistake!

Post by cowdogman »

Kenkat wrote: Wed Mar 15, 2023 8:59 am One thing I will point out if you don’t know and that I recently learned helping my son roll over a Roth 401(k). If there is any employer match money, that actually needs to be rolled over to a traditional rollover IRA unless you want to do a Roth conversion and pay taxes on the rollover amount. The employee sourced money can go to a Roth IRA rollover. So if yo rollover a Roth 401(k), you would potentially have two rollover accounts, one Roth and one traditional.
That's because employer match money cannot be contributed to a Roth account--so there can never be employer-match money in a Roth account in a 401(k).
Employer matching and profit-sharing contributions
Only employee elective deferrals may be contributed to a designated Roth account. Matching contributions and profit-sharing contributions may not be made directly to the designated Roth account. An employer may use designated Roth deferrals in calculating a matching contribution, but the match amount must be contributed to another account within the plan.
https://www.irs.gov/retirement-plans/pl ... th-account#
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Re: Confounding 401k rollover mistake!

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muel87 wrote: Wed Mar 15, 2023 7:31 am
cowdogman wrote: Tue Mar 14, 2023 7:56 pm
I'm not an expert, but here's what I would explore:

1. Treat Roth contribution to 401(k) as excess contribution and ask Vanguard to return it.

2. Take the cash returned and either (a) treat it as a distribution from your Roth IRA or (b) re-deposit it to the Roth IRA as a rollover.

1 and 2(b) restore the status quo ante, but are very probably not expressly permissible (without waiver) and may not line up with your 1099s.

I'm not sure why you want to "Rollover money back from my solo 401k trust into my IRA." I explored that move several years ago with Vanguard and was told "not possible--our computer system not up to the task."
The issue is that there is no money in my tIRA. I rolled it all over into the solo 401k. They already said that they would return it as excess, but theres nothing to return. Was your solo 401k a Vanguard one? Mine is self directed meaning I can pretty much do whatever I want with the money.
I understand that Vanguard keeps IRA accounts open even with a zero balance. Or is the IRA not with Vanguard? You could establish a new Vanguard Roth IRA.

My 401(k) was not self-directed. The problem, as explained with me, was that it was just not possible with the Vanguard computer system. It still irritates me how little Vanguard tried to help--or so it seems.
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Kenkat
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Re: Confounding 401k rollover mistake!

Post by Kenkat »

cowdogman wrote: Wed Mar 15, 2023 9:52 am
Kenkat wrote: Wed Mar 15, 2023 8:59 am One thing I will point out if you don’t know and that I recently learned helping my son roll over a Roth 401(k). If there is any employer match money, that actually needs to be rolled over to a traditional rollover IRA unless you want to do a Roth conversion and pay taxes on the rollover amount. The employee sourced money can go to a Roth IRA rollover. So if yo rollover a Roth 401(k), you would potentially have two rollover accounts, one Roth and one traditional.
That's because employer match money cannot be contributed to a Roth account--so there can never be employer-match money in a Roth account in a 401(k).
Correct, it’s just that most 401(k) statements or websites gloss over the fact that the money is in two separate buckets - i.e., here’s your current balance - so it’s not obvious or was not to me at least.
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Re: Confounding 401k rollover mistake!

Post by muel87 »

cowdogman wrote: Wed Mar 15, 2023 9:52 am That's because employer match money cannot be contributed to a Roth account--so there can never be employer-match money in a Roth account in a 401(k).
FYI, employer-match money can now be Roth. But the employer has to opt-in to that.
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Re: Confounding 401k rollover mistake!

Post by cowdogman »

muel87 wrote: Wed Mar 15, 2023 10:41 am
cowdogman wrote: Wed Mar 15, 2023 9:52 am That's because employer match money cannot be contributed to a Roth account--so there can never be employer-match money in a Roth account in a 401(k).
FYI, employer-match money can now be Roth. But the employer has to opt-in to that.
Source? Employer's can match employee contributions to Roth, but the match is pre tax and goes into a trad 401(k) account. Has that changed?
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Re: Confounding 401k rollover mistake!

Post by sailaway »

cowdogman wrote: Wed Mar 15, 2023 10:48 am
muel87 wrote: Wed Mar 15, 2023 10:41 am
cowdogman wrote: Wed Mar 15, 2023 9:52 am That's because employer match money cannot be contributed to a Roth account--so there can never be employer-match money in a Roth account in a 401(k).
FYI, employer-match money can now be Roth. But the employer has to opt-in to that.
Source? Employer's can match employee contributions to Roth, but the match is pre tax and goes into a trad 401(k) account. Has that changed?
About a month ago, with Secure 2.0. The employer has tas to add this option to the plan, though, so I doubt there is anyone doing this just yet. Existing plans are amended in a schedule.
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Re: Confounding 401k rollover mistake!

Post by cowdogman »

sailaway wrote: Wed Mar 15, 2023 11:17 am
cowdogman wrote: Wed Mar 15, 2023 10:48 am
muel87 wrote: Wed Mar 15, 2023 10:41 am
cowdogman wrote: Wed Mar 15, 2023 9:52 am That's because employer match money cannot be contributed to a Roth account--so there can never be employer-match money in a Roth account in a 401(k).
FYI, employer-match money can now be Roth. But the employer has to opt-in to that.
Source? Employer's can match employee contributions to Roth, but the match is pre tax and goes into a trad 401(k) account. Has that changed?
About a month ago, with Secure 2.0. The employer has tas to add this option to the plan, though, so I doubt there is anyone doing this just yet. Existing plans are amended in a schedule.
Thanks. Good to know. I wonder what the tax consequences, if any, are for the employer making the Roth contribution--since the contribution will be classified as after-tax vis a vis the employee.
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Re: Confounding 401k rollover mistake!

Post by muel87 »

cowdogman wrote: Wed Mar 15, 2023 11:24 am Thanks. Good to know. I wonder what the tax consequences, if any, are for the employer making the Roth contribution--since the contribution will be classified as after-tax vis a vis the employee.
What do you mean? Wouldnt it just go into the Roth balance, and if you left you could roll it over into a Roth IRA?
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Re: Confounding 401k rollover mistake!

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muel87 wrote: Wed Mar 15, 2023 1:33 pm
cowdogman wrote: Wed Mar 15, 2023 11:24 am Thanks. Good to know. I wonder what the tax consequences, if any, are for the employer making the Roth contribution--since the contribution will be classified as after-tax vis a vis the employee.
What do you mean? Wouldnt it just go into the Roth balance, and if you left you could roll it over into a Roth IRA?
I was thinking about it from the employer POV. When an employer makes a matching contribution to a pre-tax 401(k) account, the employer (I'm sure) treats it as a business expense for tax purposes (that is, it "takes a deduction")--and eventually someone will pay tax on the amount contributed. But if an employer makes a matching contribution to a Roth 401(k) no one will ever pay tax on the amount contributed. Then so does the employer get to treat the match as a business expense? I don't know.

Or maybe the Roth match goes on the employee's W2? If so, I wonder how many employees will want that.

And as a solo 401(k) owner I'm curious whether I will be able to make employer contributions to my Roth solo 401(k) account (Vanguard would need to amend the plan) and if so whether I will be able to deduct them (from my AGI) like I do for pre-tax employer contributions. I doubt it.
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Re: Confounding 401k rollover mistake!

Post by muel87 »

cowdogman wrote: Wed Mar 15, 2023 1:43 pm And as a solo 401(k) owner I'm curious whether I will be able to make employer contributions to my Roth solo 401(k) account (Vanguard would need to amend the plan) and if so whether I will be able to deduct them (from my AGI) like I do for pre-tax employer contributions. I doubt it.
If you want more Roth contributions with your solo 401k, highly recommend you go self-directed. You can make $66k in Roth IRA contributions a year (via megabackdoor) if you have the income (plus your regular Roth IRA contributions).
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Re: Confounding 401k rollover mistake!

Post by cowdogman »

muel87 wrote: Wed Mar 15, 2023 4:38 pm
cowdogman wrote: Wed Mar 15, 2023 1:43 pm And as a solo 401(k) owner I'm curious whether I will be able to make employer contributions to my Roth solo 401(k) account (Vanguard would need to amend the plan) and if so whether I will be able to deduct them (from my AGI) like I do for pre-tax employer contributions. I doubt it.
If you want more Roth contributions with your solo 401k, highly recommend you go self-directed. You can make $66k in Roth IRA contributions a year (via megabackdoor) if you have the income (plus your regular Roth IRA contributions).
I kinda like being very plain vanilla solo 401(k) activity.
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Re: Confounding 401k rollover mistake!

Post by LotsaGray »

muel87 wrote: Tue Mar 14, 2023 3:16 pm
Nate79 wrote: Tue Mar 14, 2023 11:40 am Wow. You might want to message Alan S. to comment on your question.
Tried to message him, not sure if it's sending. Vanguard called me back to tell me to ask a tax consultant / CPA.
Agree Alan S. is a great resource on these things. If nothing from him and you still wish to get his input, consider joining/posting over at
https://www.irahelp.com/forums/ira-discussion-forum

He is quite active overthere in responses. Even if he doesn't reply there, there are a couple of other knowledgeable posters who might reply.
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Re: Confounding 401k rollover mistake!

Post by muel87 »

LotsaGray wrote: Mon Mar 27, 2023 2:09 pm Agree Alan S. is a great resource on these things. If nothing from him and you still wish to get his input, consider joining/posting over at
https://www.irahelp.com/forums/ira-discussion-forum

He is quite active overthere in responses. Even if he doesn't reply there, there are a couple of other knowledgeable posters who might reply.
Alan helped me with many thorough responses over about a 2 week period and I got it all worked out. Happy to share with anyone needing to correct a rollover mistake, I feel like what I learned getting into the weeds with him would prepare me for many, if not most of those scenarios.
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Re: Confounding 401k rollover mistake!

Post by 123 »

muel87 wrote: Tue Mar 14, 2023 10:35 am So, last year we accidentally rolled over my wife's Roth 401k balance into a traditional IRA. Not allowed. However, I subsequentl...
It would seem that the Roth money would essentially just increase the basis in the traditional IRA, the same as if non-deductible contributions had been made. But I'm not an expert.
The closest helping hand is at the end of your own arm.
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Re: Confounding 401k rollover mistake!

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123 wrote: Wed Mar 29, 2023 10:41 pm
muel87 wrote: Tue Mar 14, 2023 10:35 am So, last year we accidentally rolled over my wife's Roth 401k balance into a traditional IRA. Not allowed. However, I subsequentl...
It would seem that the Roth money would essentially just increase the basis in the traditional IRA, the same as if non-deductible contributions had been made. But I'm not an expert.
You cant roll Roth 401k into a trad. IRA. Once something goes Roth (401k or IRA), it can never return.
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