Rolled to ROTH IRA - Wants to change mind, any options?

[Lou S.]

So in 2017 (more than a little more than 60 days ago, I checked) a participant elected to roll over a fairly substantial pre-tax 401(k) directly to a ROTH-IRA.

Despite making this election and agreeing they had read the Special Tax Notice that indicates if you elect to rollover to a ROTH IRA this will be tax able (but not subject to the 10% penalty) participant now claims they had no idea it would be taxable and wanted it to go to pre-tax IRA.

Is there any "re-charaterization" option available to the participant to convert the ROTH-IRA back to a traditional IRA for 2017 that I am unaware of?

I'm also 99.9% sure the transaction can't be unwound by returning the funds to the Plan and re-issuing as rollover to traditional IRA but on the 1 in a 1000 chance I'm missing something I thought I'd ask here.

Nothing appears wrong with any paperwork and the funds did get to her ROTH-IRA and were cashed.

[Lou S.]

Well it looks like I found the answer to my own question while researching this so I'll put what I found in case others find themselves in a similar situation or if there are differing opinions.

I will also note this only applicable to tax years before 1/1/2018 because it appears the rules have changed and this won't be applicable beyond the due date of tax return with extension for the tax payer after the 2017 year.

Under Treasury Reg 1.408A-5 the ROTH-IRA rollover from the qualified Plan can be recharacterized by making a trustee-to-trustee transfer from the ROTH IRA to a traditional IRA.

There are additional caveats about earnings but it appears this is perfectly possible and allowable for any reason, including "damn I owe what in taxes?!?!?!"  which does not need to be disclosed to the IRA. At least for conversions done in 2017.

 

 

[david rigby]

It's unclear from your phrasing exactly what your role is.  If you represent the Plan from which the distribution came (eg, sponsor rep or TPA rep), it may be prudent to consider whether you should be involved in solving this "problem".  But maybe it's just me.

[Lou S.]

Yeah, just TPA getting angry call from participant after 1099-Rs went out.

Had I looked at this thread

 

I'd have had my answer right away.

As for "solving the problem" the Plan will be telling the participant to talk to their tax advisor and IRA custodian to discuss options but informally suggesting without giving tax advice that they should be able to recharacterized their ROTH IRA as a traditional IRA if they act quickly and if that is their intention but that is a matter for them, their IRA custodian, their tax advisor, and their financial advisor.

Fore some read the link is embedding but it is the recharaterization thread in the IRA sub forum.

 

[Mike Preston]

Link does not work.