401(k) rollover to Roth— Tax Question

I’m not an accountant, nor do I know if my response is 100% correct. But I’m going to tell you what happened with my wife (no pics).

Alos, I’m confused by you saying he already took the tax hit in 2021.

There are, to my understanding, no tax implications when rolling over a 401(k) into a traditional/rollover IRA these are both pretax accounts (or the traditional is deductible on your return I believe). The taxing happens when you convert to a Roth (post-tax contributions, tax-free growth).

So, for round numbers, we converted $60K from previous employers 401K to rollover ira. Then, each year, for 3 years, we converted $20k from rollover/traditional Ira into the Roth IRA. We only paid taxes on $20K each year that we converted.

As others have said, something in your scenerio is not right.

If he correctly did a rollover from 401(k) to Rollover/Traditional IRA, there is no tax hit for that.

You pay tax on a Roth Conversion based on whatever the amount rolled is. The exception to that is if there is some post tax dollars (not Roth) somewhere, then there is a pro rata calculation performed to determine how much of the conversion is taxable.

So... if he did the 401(k) to Trad rollover, and then moves that (higher) balance now, he pays tax on that higher balance if he does a conversion on all of it.

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Are you suggesting he deposited the money into the wrong account, then paid the income tax based on the 1099 he received and didn't notice paying marginal taxes on the rollover in April, and STILL forgot to recharacterize it to a Roth?

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He gave me access to his Vanguard account so I could see what was what.

The rollover check was deposited into the rollover IRA in 9/21. I walked him through opening the Roth around the same time, but did not move any of the rollover money into the Roth account.

After seeing the transactions and talking to him again, he apparently got the 1099, gave it to his bookkeeper, paid the income taxes on that— and still didn’t move the money into the Roth account.

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Something tells me either A) there's no helping your brother or B) it's not enough money to pay for an amendment

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A— he’s my brother, and I love him, a disorganized mess though, he is
B- the initial rollover was ~$34K and it’s over $60K now, so it’s not an insignificant amount.

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If he corectly put the money into the Rollover IRA (either trustee to trustee or within 60 days) and yet somehow paid tax on this, the only way to fix is to amend the return.

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That’s exactly what happened. So, now, he’s looking at an amended return to recoup the taxes he paid on the initial rollover, and will have to either roll over the higher amount to the Roth and pay taxes on that amount, or leave it be in the traditional and take the tax hit when he begins taking withdrawals at retirement, correct?

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Do you k ow if it was a trustee to trustee rollover or did he get the check and deposit himself in 60 days?

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It was a check, deposited within the 60 days.

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If the latter… then the mistake was not telling the preparer what happened, or he told them and they screwed the pooch.

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Sounds like this is on my brother. He apparently thought the 1099 covered the taxes on the rollover to a Roth, since I had told him he would be taxed on that. He’s not a dumb guy by any means, but he’s definitely out of his element with this sort of thing. I probably should have hand held a little more in retrospect.

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If the preparer screwed up generics to push them to do the amendedreturns at no cost. Whenever I see a random 1099-R, I always ask, what exactly happened here?

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I agree the preparer should have asked if there was no explanation on what the 1099 was for (and maybe they did ). Either way, I told him to call his preparer and let them know this was for a rollover, not a distribution. Hopefully they’ll file the amendment at no charge for him. The bigger oof is that his investments are actually outperforming the market and now if he rolls it over to the Roth, he’ll be giving more of it to Uncle Sam. Smh.

Thanks for the help!

Taxes on the entire roll-over amount.