60 Day period to undo a ROTH conversion?

[cat4ever]

Somehow wires got crossed and a withdrawal from my 401K went into my ROTH account (direct deposit). I did not want to do a conversion and it was a large amount of money. Is there any way to undo this? This just happened a week ago.

This is kind of the reverse of having 60 Days to roll over an IRA withdrawal into a ROTH, but I don't see any info on this situation on the inter-webs.

 

[Dash man]

As of December 2017 (TCJA) you are no long able to recharacterize Roth conversions. Roth conversions are now permanent.

 

[cat4ever]

Do you think if Fidelity worked with the IRS and say it was their fault there would be a way for them to reverse it on their end?

 

[Dash man]

Give them a call, but I don’t think they can. But I’m just SGOTI.

 

[cat4ever]

One other possible way to help ameliorate this unfortunate event would be to withdraw as much Roth principal as possible I guess. Having opened the Roth in 1998 with $124,000 and withdrawing $70,000 of principal in 2017 I should have $54,000 left to withdraw tax and penalty free, which is about 1/4 the amount of this accidental Roth conversion. Then in two years I'll be 59 1/2 so at that point I'll be able to access the principal of this recent rollover tax and penalty free if my understanding is correct, is that right? I'll just have to tough it out until then.

 

[TheWizard]

OP apparently wanted to make a withdrawal from that 401(k) but the amount got converted to Roth IRA instead?

So what's the problem?
Just withdraw that amount from the Roth IRA.
It's a taxable event now, whether you withdraw it from the Roth or leave it there.

The one thing you can't do is move it back into your 401(k) or traditional IRA...

Edit: if OP is under 59-1/2, there could be a penalty for effectively doing a 401(k) withdrawal...

 

[cat4ever]

OP apparently wanted to make a withdrawal from that 401(k) but the amount got converted to Roth IRA instead?

So what's the problem?
Just withdraw that amount from the Roth IRA.
It's a taxable event now, whether you withdraw it from the Roth or leave it there.

The one thing you can't do is move it back into your 401(k) or traditional IRA...

You have to wait 5 years to withdraw any of the converted amount without penalty. I'm 57 years old and each conversion gets it's own 5 year clock.

 

[HarryHawk]

Last year (2021) I had a mix up with a Roth conversion regarding the amount and withholding. My account is with Schwab. It was undone/corrected.

 

[cathy63]

One other possible way to help ameliorate this unfortunate event would be to withdraw as much Roth principal as possible I guess. Having opened the Roth in 1998 with $124,000 and withdrawing $70,000 of principal in 2017 I should have $54,000 left to withdraw tax and penalty free, which is about 1/4 the amount of this accidental Roth conversion. Then in two years I'll be 59 1/2 so at that point I'll be able to access the principal of this recent rollover tax and penalty free if my understanding is correct, is that right? I'll just have to tough it out until then.

Are you accounting for the taxes on the Roth conversion? I'm not sure if you were trying to make a withdrawal from your 401(k), or a rollover to a traditional IRA.

If you were intending to make a withdrawal of ~$200K at age 57, you would owe $20K in penalties plus about $45K in taxes (if single or $36K if married). If you leave the money in the Roth, then you only owe the taxes and not the penalties, and you can use the $54K of prior contributions to cover the tax owed. But then that leaves you with only $9K in your pocket instead of the $135K you were expecting, so how do you make up that shortfall?

If you were intending to do a rollover to a tIRA, then that would have been a tax-free transaction and this is a pretty big blow. You're paying tax at 24% and 32% marginal rates, which could very well be higher than you would pay if it had gone into the correct account.

Have you talked to Fidelity about this? Do they accept any responsibility for the error? Or do they have any kind of journaling transactions they can do to redirect the funds to the correct account?

 

[cathy63]

You have to wait 5 years to withdraw any of the converted amount without penalty. I'm 57 years old and each conversion gets it's own 5 year clock.

Yes, but you were already subject to the 10% penalty for an early withdrawal from your 401k. It's the exact same penalty if you convert to a Roth IRA and then do an early withdrawal from there.

 

[TheWizard]

Yes, but you were already subject to the 10% penalty for an early withdrawal from your 401k. It's the exact same penalty if you convert to a Roth IRA and then do an early withdrawal from there.

I'm not sure that's correct.
I'm pretty sure that folks under age 59-1/2 can do Roth conversions from a 401(k) without penalty so long as the entire amount goes into the Roth IRA and taxes on the conversion are paid with other money...

 

[cathy63]

I'm not sure that's correct.
I'm pretty sure that folks under age 59-1/2 can do Roth conversions from a 401(k) without penalty so long as the entire amount goes into the Roth IRA and taxes on the conversion are paid with other money...

Yes, you can definitely do a Roth conversion from a 401k and just pay the taxes. There's no penalty and the 5-year clock on the conversion starts ticking.

If she was intending to do a straight withdrawal from the 401k and spend the money, then it's exactly the same to do it in two steps. 1: convert to Roth; 2: withdraw from Roth. In both cases the penalty is 10%.

Though maybe this was a Roth 401k and OP never made any pre-tax contributions? In that case the penalty only applies to the employer match and earnings so putting it in a Roth IRA makes things much worse. It's hard to tell with incomplete information.

 

[SecondCor521]

OP, it would be helpful if you could clarify what you actually were intending to do vs. what actually happened.

You also don't indicate whether it was your fault or Fidelity's fault. If it was Fidelity's fault and you can demonstrate that to them, then they should be able to unwind the transaction in such a way where the eventually reported information to the IRS will match what you actually wanted to have happen. In other words, they would be able to fix it seamlessly.

If it was your mistake, then pretty much all of the previous comments apply.

 

[cat4ever]

Clarifications: Using for vacation home purchase

Fidelity: After some more research I'm thinking there's a good chance it was me, and there's likely no way to prove it was Fidelity in either case. Fidelity is researching it for me though.

 

[pb4uski]

One other possible way to help ameliorate this unfortunate event would be to withdraw as much Roth principal as possible I guess. Having opened the Roth in 1998 with $124,000 and withdrawing $70,000 of principal in 2017 I should have $54,000 left to withdraw tax and penalty free, which is about 1/4 the amount of this accidental Roth conversion. Then in two years I'll be 59 1/2 so at that point I'll be able to access the principal of this recent rollover tax and penalty free if my understanding is correct, is that right? I'll just have to tough it out until then.

But if you had done the 401k withdrawal as you intended you would have paid tax and 10% penalty too, right? Wouldn't it be the same if you just withdrew the Roth conversion from the Roth?

I'm thinking that the end result would be the same but that it'll be that you just added a step in-between.... or am I missing something?

 

[cathy63]

Clarifications: Using for vacation home purchase

Fidelity: After some more research I'm thinking there's a good chance it was me, and there's likely no way to prove it was Fidelity in either case. Fidelity is researching it for me though.

If this was a withdrawal from a traditional 401k as opposed to a Roth 401k, you're actually better off to do the Roth conversion and then take the withdrawal from the Roth IRA. That way you get part of the withdrawal penalty free since you do have some contributions still in the account. If you also have some conversions that are over 5 years old in the account, then those will also come out penalty free.

 

[cat4ever]

But if you had done the 401k withdrawal as you intended you would have paid tax and 10% penalty too, right? Wouldn't it be the same if you just withdrew the Roth conversion from the Roth?

I'm thinking that the end result woudl be the same but that it'll be that you just added a step in-between.... or am I missing something?

No penalty, it was a 401K withdrawal under the rule of 55.

 

[cat4ever]

If this was a withdrawal from a traditional 401k as opposed to a Roth 401k, you're actually better off to do the Roth conversion and then take the withdrawal from the Roth IRA. That way you get part of the withdrawal penalty free since you do have some contributions still in the account. If you also have some conversions that are over 5 years old in the account, then those will also come out penalty free.

The only contribution/conversion was the original 128K, of which 58K is still available to withdraw tax/penalty free, and yes I do plan to take out at least that 58K, and then make sure I do an 8606 for it .

But you bring up a good point, What do I need to do (if anything) to make sure this is seen as a conversion, and not a (way over the limit) contribution?