Correcting Rollover of After-Tax 401k Money
Client age 54 rolled over $1 million from his 401k plan to his IRAs in March 2021. The $1 million consisted of $40,000 Roth, $60,000 after-tax contributions and $900,000 of pre-tax money. The 401k recordkeeper sent one check for the $40k Roth money which client deposited into his Roth IRA and another check for $960,000 which client deposited into his Traditional IRA.
Client went back to the 401k recordkeeper in November and explained that his intent was to roll the after-tax money to his RIRA. Recordkeeper told him that since the check was cashed, there was nothing they could do. The IRA custodian also said there is nothing they can do. The IRA custodian does not track IRA basis.
I’m wondering if it’s possible to isolate the $60,000 of after-tax basis in a second IRA and then roll the $900,000 remaining in IRA #1 back into the client’s 401k. If this is done before the end of 2021, can the client then do a Roth conversion in 2022 of the $60,000 (all after-tax money) in IRA #2?
Permalink Submitted by Alan - IRA critic on Wed, 2021-11-24 14:12
Yes, and that is the only solution that does not include converting pre tax dollars. There could be a small gain or loss on the 60,000 transferred to a new IRA before converting, and it is risky to convert before the 401k plan actually accepts and deposits the pre tax rollover. And given potential tax legislation to eliminate the back door Roth, client needs to get on this ASAP, since 2021 may well be the last opportunity to isolate the after tax basis for conversion purposes. Client will also need to update his Roth IRA basis tracking due to the Roth 401k rollover and the intended conversion.