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Did I make a $20,000 Mistake in my Roth Conversion? Any Way Out? Sorry, Long Post

Home Tax Reduction Did I make a $20,000 Mistake in my Roth Conversion? Any Way Out? Sorry, Long Post

  • Avatar skidude 
    Participant
    Status: Retired
    Posts: 2
    Joined: 04/12/2019

    Fidelity’s Pitch:

    In late 2016, I was contacted by a representative of Fidelity, my company 401K provider, to see if I was interested in rolling my IRA from Vanguard to a Rollover IRA with them.  The purpose of this was to allow me to perform a Roth conversion without any tax consequences. This would  be done by rolling only the taxable funds in the new Rollover IRA into my 401K , leaving my basis of $59K that came from non deductable IRA contributions over the years (IRS Form 8606 Line 14, ).  This  remaining  basis in the Fidelity Rollover IRA could then be converted to a Roth IRA.  When I filed my taxes for 2018 and filled out the form 8606, on Line 6 where it asks for the value of all my traditional IRAs as of 12/31/18,  I would then be able to put in $0, since all my IRA funds had been rolled over into my 401K.  This would take the pro rata rule out of play and the entire $59K conversion would not be taxable.

    Roll taxable IRA Funds to 401K, Convert Non Taxable Basis to Roth   

    This sounded good to me, so in late 2016 and early 2017 I rolled my IRA from Vanguard to a Rollover IRA at Fidelity. On 1/12/98, we started the rollover of all my taxable funds in My Fidelity Rollover IRA into my company 401K (also with Fidelity) to isolate my basis of $59K.  They then converted those funds to a Roth IRA.

    The Problem

    In April 2018 I was laid off from my job.  I was fortunate to get a very generous several package.  In September of 2018, after reading about the pros and cons of leaving my 401K at my company, I decided to roll my 401k (which now had my former IRA funds) back to Vanguard.  I had to call Fidelity to do this, and they did try to get me roll the funds back to my Fidelity IRA instead of Vanguard because they didn’t want to lose this significant amount of money.  Unfortunately, They didn’t mention the tax implications of rolling my 401K money into any IRA since I had done the Roth conversion in 2018, namely, that I would now have to report very large IRA balance on Form 8606 Line 6, which would make all of my $59K rollover of my basis taxable.

    Best I understand, since Roth recharacterizations are prohibited under the new TCJA tax plan,  I am stuck with this huge increase in my taxes for 2018.  Am I missing something? Is there a way out?  Thanks for any help or comments anyone might have.

    SkiDude

    #206063 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1626
    Joined: 02/01/2016

    I’m sorry this happened, but they were your accounts and your mistake. You probably dealt with the administrators of your 401k, they likely had no view of your other accounts. They would not likely have had any insight into the Roth conversion and any tax implications of you rolling to a Vanguard traditional IRA. Also, they are typically prohibited from giving tax advice.

    Unfortunately, after the TCJA, there is no way to correct this and avoid pro-rata taxation unless/until you can rollover the pre-tax balances in all pre-tax IRAs to a 401k, 403b, or 457b.

    #206082 Reply
    Liked by jfoxcpacfp, Peds
    Avatar SLC OB 
    Participant
    Status: Physician
    Posts: 397
    Joined: 06/23/2018

    Sorry dude, bummer! No idea but I believe Spiritrider, one smart person!

    #206085 Reply
    Liked by jfoxcpacfp
    Faithful Steward Faithful Steward 
    Participant
    Status: Financial Advisor, Small Business Owner
    Posts: 334
    Joined: 06/12/2017
    On 1/12/98, we started the rollover of all my taxable funds in My Fidelity Rollover IRA into my company 401K (also with Fidelity) to isolate my basis of $59K.  They then converted those funds to a Roth IRA.

    Click to expand…

    Did you travel back in time? What is the correct date? Was it 1/12/2018? If so, why the year-long delay between the transfer of your IRA from Vanguard to Fidelity and the rollover of your pre-tax contribution into the 401(k)? Not doing it in 2017, in hindsight, was a colossal mistake.

    Assuming that both the Roth Conversion and the Rollover of your 401(k) to Rollover IRA both took place in 2018, you just learned a hard and expensive lesson.

    Did the same advisor who presented the Roth Conversion strategy also suggest rolling your 401(k) into a Rollover IRA in the same year? If so, you might have recourse. Otherwise, this is the price of DIY and piecemeal advice from “advisors” who are not fully aware of your entire situation.

    Wish I had better news.

     

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    http://www.fswealthadvisors.com | (717) 496-0900

    #206088 Reply
    Liked by spiritrider
    Avatar skidude 
    Participant
    Status: Retired
    Posts: 2
    Joined: 04/12/2019

    Thanks your time in reading and responding to this post.  Date was supposed to be 1/12/18, not 98.

    To answer your question, Yes, the same advisor did both.  She didn’t really present a Roth Conversion strategy,  I had asked her if she could analyze whether it would make sense to do Roth conversions now when our income is down, she said she was not a CPA but could do a high level Roth analysis just to analyze possible tax strategies, and that we should retain a CPA before making any moves that could impact our taxes.  During our meetings,  I don’t remember telling her that I had already done a Roth conversion already in 2018 (as you said, a colossal mistake) and don’t remember her asking.  On the account/asset list I gave her to do the planning, my IRA Rollover account only had $43 since I had rolled almost all of those funds into my 401K, but this evidently did not catch her attention.

    When we got her recommendations, besides the investment, cash flow, spending level, pension payout recommendations, and high level Roth conversion analysis (convert 35-40K per year from taxable account). She recommended rolling my 401K to into an IRA, which I did one week later.

    #206131 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1726
    Joined: 03/01/2018

    Sorry this happened. It’s not the worst mistake in the world. Especially if your income is down. And given current relatively low tax rates. All you really did is pay some taxes now that you would have otherwise paid in the future.

    Now, you need to get a new job and access to a 401k, or earn some self employment income and setup a solo 401k. Then get done in 2019 what you tried to do in 2018.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #206151 Reply
    Liked by SLC OB, Peds

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