401k Conversion to IRA Mistake
What I have already done:
- Moved almost all (99.9%) of the Roth portion of my 401k to my Roth IRA, in two trustee to trustee transfers, i.e., no check(s) were sent to me. The reason I didn’t transfer the entire Roth balance is the holder of my 401k would only transfer a maximum of 99% of the balance at one time, they said, because I have a brokerage account open through my 401k, so I’ve done 2 99% transfers. If I close my brokerage account I believe they would transfer the remaining Roth 401k balance to my Roth IRA, at my request.
- Moved the after tax portion of my 401k to my Roth IRA, essentially doing an in process Roth conversion, in a trustee to trustee transfer. There was also a before tax portion of the after tax balance consisting of the earnings from the after tax portion.
- Moved the before tax portion of my after tax portion to my Traditional IRA. In this case, the 401k holder sent a check to me for the entire before tax balance of the after tax portion with the check made out to me. I deposited that check into my Traditional IRA. My plan is to convert this balance to Roth via a back door Roth transfer and pay the taxes due as estimated taxes.
Now the after tax portion of my 401k is still in my 401k. After reading Ed Slott’s book I see I should have transfered my after tax portion to my Traditional IRA before transfering my after tax portion to my Roth IRA. My question(s) are, how do I recover from what I’ve done. What am I required to do with the remaining before tax balance in my 401k in accordance with IRS rules? Can I leave it in my 401k as before tax money, after reading the book it appears this violates the IRS Pro Rata rule? Am I required to remove it from my 401k in accordance with the IRS’s pro rata rules, and if so can I transfer it via a trustee to trustee transfer to my Traditional IRA and leave it as before tax money? Or, do I have to withdraw this before tax balance from my 401k by either taking it as a distribution or converting it to Roth and depositing it in my Roth IRA (I assume I would do this by transferring it in a trustee to trustee transfer to my Traditional IRA and converting the entire balance to Roth via a back door Roth conversion) and under either of these two options, I assume I would have to pay the taxes due on this balance in the process of taking the distribution or converting the balance to Roth, in accordance with the IRS’s pro rata rules?
I understand there could be other requirements and options that I am unaware of, and if so, please identify these and advise me on how to handle them.
Thanks,
Permalink Submitted by Alan - IRA critic on Wed, 2024-10-09 15:57
Assuming that you have separated from service from this employer, you should have requested a split direct rollover of the non Roth balance with the after tax portion going to your Roth IRA, and the rest of the account to your TIRA. This avoids any withholding.
Since you received a check made out to you for the taxable gains in the after tax account, that check should have had 20% withheld, and in order to complete the 60 day rollover of the gross distribution, you will have to replace the withheld amount from other funds to deposit to your TIRA.
It’s not clear how much is left in the 401k, but it might be the pre tax account balance that was never a part of the after tax sub account. As for the after tax sub account itself, any distribution is required to include the gains on the after tax contributions, so I assume that the plan did the distribution of gains at the same time as the after tax balance, but sent the after tax portion as a direct rollover to your Roth IRA but the pre tax balance to you personally. This is not the usual distribution pattern, and I don’t know if you requested this or not.
If the 401k still holds the pre tax account, you can leave it there or do another direct rollover to your TIRA, but due to the number of direct rollovers you have already done this year, you may have to wait until January to request another direct rollover. I hope that the 1099R forms you will receive in January (at least 3 of them so far) will not include an unpleasant surprise.
At least you seem to have avoided the worst error, which is to have after tax funds from your 401k rolled into your TIRA, or worse yet Roth 401k balances going to a TIRA.
Permalink Submitted by CHRISTOPHER DURAND on Wed, 2024-10-09 17:34
Thankyou very much. What I wasn’t sure of is that the after tax money was in a sub account, I thouht it must have been segregated in some way from the before tax money. This explains why the company holding my 401k allowed me to make the transfers I made without alerting me that I needed to withdraw my entire balance, i.e.: the before tax total, to avoid being in violation of IRS pro rata rules. I plan to call them tomorrow to transfer the rest of my Roth money to my Roth IRA, since I closed my brokerage account through them earlier this week, and now discuss the before tax transfers so I clearly understand why I was allowed to make the transfers I made. With your explaination, I am now better prepared for this discussion.
Permalink Submitted by CHRISTOPHER DURAND on Fri, 2024-10-11 12:00
I just realized that my original post had an error. The money remaining in my 401k is before tax, not after tax as I said in the paragraph following the points on what I had done. Does this change the comments on my violating the IRS pro rata rule and if I can leave the before tax portion in my 401k. Thanks, Chris