Vanguard & Mid-air Conversion | Ed Slott and Company, LLC

Vanguard & Mid-air Conversion

Hi,
Why does Vanguard use the term "mid-air" conversion when someone directly rolls over a pre-tax 401(k) to a Roth IRA? Does Vanguard roll over the money first to the client's TIRA and then to the client's Roth IRA? I thought the PPA 2006 eliminated that step.
Thank you.

  • I think that what Vanguard calls a "mid-air" conversion is a distribution consisting of pre-tax money from the qualified retirement plan that the plan thinks is and reports as a nontaxable rollover to a traditional IRA but the participant diverts the payment to a Roth IRA instead.  A distribution of pre-tax money that the plan knows is going to a Roth IRA should be properly reported by the plan as taxable on the code G Form 1099-R, so there is no mid-transaction change in the destination account type if it is deposited into a Roth IRA.
  • Actual "mid-air" Roth conversions present challenges in reporting the transaction on the tax return because the Form 1099-R with code G will have a zero taxable amount shown in box 2a and the plan almost invariably declines to issue a corrected Form 1099-R showing the taxable amount in box 2a since the plan's position will be that the plan initiated a rollover to a traditional IRA as instructed by the participant.  My general suggestion under these circumstances is to submit a substitute Form 1099-R (Form 4852) on which the participant can provide explanation that the direct rollover was actually to a Roth IRA despite the plan reporting it as a direct rollover to a traditional IRA.
  • If the direct rollover to a Roth IRA was correctly initiated by the plan and will be properly reported by the plan as a taxable rollover to a Roth IRA, the money should be deposited directly into a Roth IRA.  If Vanguard mistakenly deposits the money into a traditional IRA, Vanguard would have created the same problem in reverse.
  • The payment made from the plan that is to be a direct rollover to a Roth IRA should explicitly be made payable to a Roth IRA at Custodian FBO Participant, not simply to Custodian FBO Participant (perhaps including the account number of the Roth IRA established to receive the direct rollover).  Failure of the plan to be explicit that the rollover is to the Roth IRA increases the chances for the participant or the receiving custodian to mishandle the rollover.

Thank you DMx for the response, very helpful.

 

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