Have you ever accidentally put post-tax money in with pre-tax when rolling over a traditional IRA? On this episode, I’m answering a listener’s question about fixing this easy-to-make but frustrating mistake. We’ll look at the definition of a rollover, why you should separate pre-tax and post-tax money, and how to correct this situation if it occurs.
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How to Fix Your IRA Rollover Mistake

Dealing with retirement accounts and investments can be complicated, and mistakes can happen. If you recently made a mistake with your IRA rollover, don’t worry – there are ways to fix it. Whether you accidentally rolled over the wrong type of IRA, failed to meet the 60-day rollover window, or made another error, it’s important to take action and correct the problem as soon as possible to avoid potential penalties and taxes. Here’s what you need to know to fix your IRA rollover mistake.

Understand the Different Types of IRAs

Before diving into how to fix an IRA rollover mistake, it’s important to understand the different types of IRAs. Traditional IRAs and Roth IRAs are the most common types of individual retirement accounts. Traditional IRAs are funded with pre-tax dollars, meaning contributions are tax-deductible, and withdrawals in retirement are taxed as ordinary income. Roth IRAs, on the other hand, are funded with after-tax dollars, meaning contributions are not tax-deductible, but qualified withdrawals in retirement are tax-free.

In addition to these two types, there are also rollover IRAs, which are used to hold funds from a 401(k) or other employer-sponsored retirement plan when you change jobs. Rollover IRAs can be either traditional or Roth, depending on the type of retirement account the funds came from.

Identify and Understand Your Mistake

If you’ve made a mistake with your IRA rollover, the first step is to identify and understand the error you made. Common mistakes include rolling over funds from a traditional IRA to a Roth IRA without understanding the tax implications, missing the 60-day window for completing a rollover, or accidentally depositing after-tax money into a traditional IRA instead of a Roth IRA.

Consult with a Financial Advisor

Once you’ve identified your mistake, it’s important to consult with a financial advisor or tax professional who can help you understand your options and the best course of action to rectify the error. They can provide guidance on how to fix the mistake and navigate the IRS rules and regulations surrounding IRA rollovers.

Correcting Your Mistake

Depending on the nature of your mistake, there are a few different options for correcting it. If you rolled over funds from a traditional IRA to a Roth IRA and now realize it was a costly error, you can “recharacterize” the rollover, essentially undoing it and moving the funds back to a traditional IRA. If you missed the 60-day rollover window, you may be able to request a waiver of the 60-day requirement from the IRS, or consider using a trustee-to-trustee transfer instead of a direct rollover to avoid the 60-day rule altogether.

If you accidentally deposited after-tax money into a traditional IRA instead of a Roth IRA, you can consider converting the traditional IRA to a Roth IRA, but keep in mind that this will be a taxable event.

Moving Forward

After correcting your IRA rollover mistake, it’s important to review your retirement planning strategy and ensure that you have a clear understanding of the rules and regulations surrounding IRA rollovers. Consider working with a financial advisor to develop a comprehensive retirement plan that takes into account your IRA contributions, investment strategy, and long-term financial goals.

In conclusion, making a mistake with your IRA rollover can be stressful, but it’s not the end of the world. By identifying your mistake, consulting with a professional, and taking the necessary steps to correct the error, you can get back on track with your retirement planning and avoid potential penalties and taxes. Remember to stay informed and seek professional guidance to ensure that your retirement accounts are handled correctly.