When a Retirement Rollover Goes Wrong, You Pay the Price

A retirement plan participant asked to have her 401(k) assets rolled over to her traditional IRA, which would have made the rollover nontaxable. Instead, the IRA custodian deposited the amount into her Roth IRA, resulting in what was technically a Roth conversion, with any pretax amount being taxable.

She discovered the mistake when she received Form 5498, which her IRA custodian used to report the rollover. She asked the IRS for time to move the rollover to her traditional IRA as she originally intended, because, as she claimed, the financial institution had made the error. The IRS denied her request because, according to its ruling, the information she submitted as part of her request did not demonstrate that a financial institution error caused her to miss the 60-day deadline for a rollover.

That ruling, PLR 202423009, is an example of the problems that can occur when retirement accountholders are expected to coordinate transactions between financial institutions that do not communicate directly with each other. Unfortunately, it is the accountholder who bears the consequences when a rollover goes wrong, even though it is the financial institutions that design and control the rollover process.

(For readability, this article uses “401(k)” as shorthand when discussing rollovers from employer retirement plans. The proposed forms also apply to rollovers involving other eligible employer plans, including 403(b) plans, governmental 457(b) plans, pension plans, and other qualified plans.)

How Retirement Accountholders Get Stuck in the Middle

When I started working in the retirement industry many years ago, plan administrators and IRA custodians took a more active role when moving retirement assets. For example, before a plan administrator sent a rollover to an IRA, it would require the IRA custodian to provide an acceptance letter confirming that the receiving account had been established; the account type (traditional or Roth IRA); and that the IRA custodian would accept and deposit the rollover to the IRA.

This helped to prevent errors like the one in the above case.

But over time, much of that responsibility shifted to the account owner. Today, a plan administrator often sends a rollover check to the plan participant/IRA owner, even when the check is made payable to the receiving IRA custodian for the benefit of the IRA owner. And the administrator often does not require an acceptance letter or other confirmation from the receiving IRA custodian.

The participant then becomes responsible for delivering the check, matching it to the correct type of IRA, and resolving any problems if the transaction stalls or the rollover is made to the wrong account.

That is a lot to ask of someone who may complete only a few retirement-account rollovers in their lifetime and does not possess the expertise for determining if a rollover meets compliance requirements. Even those who are knowledgeable about IRAs can find themselves caught in an operational process they do not understand and cannot fully control.

It is no wonder that rollovers make people anxious. Will the money go to the right account? Should taxes be withheld? Will the check arrive on time? Could a Roth 401(k) account accidentally end up in a traditional IRA? Could a pretax 401(k) end up in a Roth IRA and create an unexpected tax bill? These are questions that cause rollover anxiety.

Making Room for a Fix

Congress recognized the problem and addressed it in Secure 2.0 Act. That provision directs the Treasury Department to develop sample forms and procedures to simplify, standardize, facilitate, and expedite rollovers to eligible retirement plans and trustee-to-trustee transfers from IRAs.

In response, the Treasury Department and the IRS published Notice 2026-49, which includes four sample forms and a proposed five-step rollover process. These forms are:

• Participant’s Rollover Request
• Receiving Plan’s Request to Distributing Plan
• Distributing Plan’s Rollover Certification
• Receiving Plan’s Rollover Acceptance

The proposed process begins with the participant giving instructions to the receiving institution. The receiving institution then contacts the distributing institution, which verifies the request and provides information about the source account. Finally, the receiving institution confirms that it can accept the rollover and provides the delivery instructions.

Only then does the distributing institution send the assets directly to the receiving institution. If a check is used, the proposal calls for it to be made payable to the receiving financial institution for the benefit of the participant and sent directly to the receiving financial institution.

Will these standardized forms make rollovers safer and easier? Possibly. The distributing institution would verify the request and provide information about the source account, and the receiving institution would confirm that it can accept the rollover and provide delivery instructions, before the rollover is processed. This would help to reduce the risk of errors. However, use of the sample forms and proposed procedures is optional.

In their current draft state, the forms have gaps, including how they identify the exact receiving account type and registration and how they handle certain Roth, aftertax, beneficiary, and Simple IRA transactions. The Treasury Department is asking for comments on the proposed procedures and forms by Oct. 23, 2026. I submitted comments recommending additional protective mechanisms to be added before the procedures are finalized. You can submit comments as well; see the instructions on Page 15 of Notice 2026-49.

You Are Still Responsible for Checking the Results

Better forms will not change the fact that if a rollover is processed incorrectly, you may be the person left dealing with the consequences. Therefore, whether the proposed forms or another process is used, you should check the transaction from beginning to end to ensure it is processed accurately. This includes confirming the following items before authorizing a rollover:

• The type of account from which the assets are leaving
• The exact type and registration of the receiving account
• Whether the amount includes pretax, designated Roth, or other aftertax assets
• Whether you are moving the entire account or only a portion of it
• Whether the assets will be sent in cash or in kind
• The exact payee and delivery instructions if a check will be issued

After the transaction, verify that the correct amount was deposited into the intended account and that the receiving institution classified the rollover properly. Also, keep copies of the forms, statements, checks, and any communication with both the distributing and receiving institutions.

What Should You Do While We Wait for Final Guidance?

If you need to complete a rollover before final guidance is issued, ask both institutions what they require before starting the transaction. Whenever possible, have the distributing institution send the assets directly to the receiving institution.

Some rollovers require help from a retirement-account specialist, particularly when the rollover includes Roth or other aftertax amounts, involves an inherited account or Simple IRA, or divides the assets among different destinations. The specialist should review the account types, tax character of the assets, paperwork, payee instructions, and final account statements.

Can We Go Back?

While Notice 2026-49 is an important and welcome step in the right direction, it does not eliminate every risk. But its basic approach could reduce rollover mistakes by restoring direct communication between the financial institutions handling the rollover.

The notice also encourages electronic delivery of rollover assets, which could make the process faster and more efficient. The modernization proposed in Notice 2026-49 should preserve the institutional responsibility that once accompanied the process rather than making the retirement account owner the messenger, troubleshooter, and last line of defense.

When it comes to rollovers, perhaps we can go back to the way it used to be done.