Single Check issued during rollover for both pre- and post-tax contributions
I put in a rollover request of a 401k that included both Roth 401k and 401k contributions. They issued a single ach transfer to my new financial institution. They sending institution has told me on 3 different occasions that this is how they do it. I advised my new financial institution, provided them a full accounting and asked them to move the Roth funds into a ROTH IRA. The receiving institution is refusing saying that they money must be sent back and reclassified. The sending institution is saying they only issue one ach and the receiving institution just needs to move the post tax into a ROTH within 60 days of receiving it. Who is right and what can I do?
Permalink Submitted by Alan - IRA critic on Fri, 2021-10-22 13:38
This is ominous. The plan administrator should be issuing two separate direct rollover checks, one for each receiving type of IRA, and the IRA custodians should be willing to work with you to make the deposits correctly if they don’t. Apparently neither is happening. Has the entire rollover actually been deposited into the TIRA account? If so, that not only a potential tax and reporting disaster, but Roth 401k money is not even eligible for rollover to a TIRA and creates an excess contribution.
What, if any, breakdown did the sending institution provide to the IRA custodian? If nothing, these people do not know what they are doing.
What institution did you originate this rollover with?
At least you found out what transpired fairly soon. How did you find out, from an on line checking of your IRA transactions?
Permalink Submitted by Tim Drag on Sat, 2021-10-23 02:07
Alight Financial is the sending institution. Merril Lynch is the receiving. This is an inherited IRA. Alight provided no breakdown and refused to release any statements for the deceased individual(im the executor). There was no way of knowing until I reviewed the accounting. I was advised to initiate the rollover online. Alight accepted it knowing there was post-tax balances. the entire balance has hit the inherited traditional IRA. I’m meeting with an accountant next week to review as well.I can’t tell you how awful Alight is.
Permalink Submitted by Alan - IRA critic on Sat, 2021-10-23 04:23
If you are the executor, then decedent’s estate inherited the pre tax 401k and Roth 401k? If so, these accounts are not even eligible to be rolled over to inherited IRAs. The Roth 401 k distribution may be tax free, but the pre tax 401k distribution would be taxable to the estate. Please correct any errors in my assumptions on the background info. If none, Alight should have been able to explain this to you up front.
Permalink Submitted by Tim Drag on Sat, 2021-10-23 17:02
There are 3 beneficiaries listed on the 401k- myself and my two brothers. The account was divided by 3 and 3 accounts were opened at Alight. The rollover took place from the created beneficiary account (at Alight) to my account at ML. The Roth should be a tax free rollover and I recognize I will owe Uncle sam on the pre-tax money as I withdraw it over the next 10 years. What I can’t figure out is that we have the documentation on what was pre and post-tax. Why can’t ML just open an inherited ROTH and transfer the money that is post-tax into it?
Permalink Submitted by Alan - IRA critic on Sat, 2021-10-23 22:01
OK, when you said that you were the executor, I thought that perhaps the estate inherited the 401k. With named beneficiaries we are now back to the original problem, the mishandling of the direct rollover to separate inherited IRA accounts. Alight should have issued two separate direct rollover checks for each beneficiary with the payee being their respective TIRA and Roth IRA inherited IRA custodian FBO (name of beneficiary) inherited IRA (or Roth IRA). That would have made it very clear to ML which account should be credited with the rollover funds.
So initial problem caused by Alight, and that cannot be corrected without the cooperation of ML. To answer your question, if you have good enough documentation (eg a final plan statement) ML should do exactly as you suggested. You could also refer them to Tax code Sec 402(c)(8), which defines the plans to which eligible rollover distributions can be made. This paragraph is copied next:
“If any portion of an eligible rollover distribution is attributable to payments or distributions from a designated Roth account (as defined in section 402A), an eligible retirement plan with respect to such portion shall include only another designated Roth account and a Roth IRA.”
So it is crystal clear that a Roth 401k account cannot be rolled to a traditional IRA.
Since this has been done and is ineligible, what you have is actually a distribution from the Roth 401k to you and an excess contribution to the inherited TIRA account, which must be withdrawn. Although most or all of the Roth 401k distribution will be tax free, you still lose the benefit of tax deferral and more tax free growth that you could earn before the account must be distributed as RMDs.
If possible, see if you can find out how Alight will report the distribution on their 1099R forms. There should be a 1099R for the TIRA direct rollover and another for the Roth 401k, with the Roth coded H in Box 7. And ML must also issue a Form 5498 to show the contribution. The IRS will look to match up the two forms and given this error they are probably not going to match up and this will cause reporting problems in addition to the tax consequences outlined above.
While this is unpleasant, any chance of getting these firms to correct the error diminishes by the day, and particularly by year end when they transfer tax reporting to their tax Depts. So you will have to work very hard over the next few weeks to get the correction made unless the balance is small enough that it does not matter. Probably the other beneficiaries are not with ML, but they still may have a problem due to Alight’s transfer process.