After-tax monies record keeping, 401k to IRA rollover
In January, 2009, I did a 401k rollover to an IRA after separating from my employer. A very small portion of the 401k, $4,816.24, was after tax monies. The entire account was several hundred thousand. I opted to have the post-tax sent to me in the form of a check and roll the bulk of the account over to an IRA. My understanding was, the post-tax income is non-taxable since I paid taxes on it already. On the check stub they list $1,020.74 as non-taxable and “total taxable amount” as $3,795.50. They then further list “after-tax basis (non-roth) $1,020.74 and “after-tax earn (non-roth) $3,795.50.
I contacted my former employer HR person who called them and she said they knew the information was wrong and I will not get a new statement, but it should be all straightened out for my 1099-R next January. I have my doubts. She also said they had to do the calculation by hand. This is a very big insurance company that has a large 401k business. I find it kind of strange that they have to do calculations by hand when the rules governing 40lk to IRA rollovers after separation of service are pretty clear.
Does anyone have any insight into what they might have done? Can I demand a written correction prior to my 1099-R next January? As a 40lk provider aren’t they responsible for accurate record keeping? I just don’t want to wait a year to get this straightened out. Thanks!
Permalink Submitted by Alan Spross on Thu, 2009-02-26 01:23
While it is rather unusual to have pre tax earnings attached to your after tax contributions, I do think that the plan design may specify this accounting setup and not be at odds with Sec 401k. It seems pretty obvious that you will get two 1099R forms for 2009, one being a direct rollover coded “G” for the bulk of the distribution, and the other 1099R showing the split between taxable and non taxable amounts (see final paragraph below re withholding). With this small amount, it may not be worth the trouble to determine if it is correct or not according to the plan document, but you have the legal right to order a copy of the plan. It also appears that you need to clarify if your actual after tax contributions were 1,021 or the full gross amount. If the latter, then there is a serious error. Your prior year statements should help clarify if your actual after tax contribution figure included the earnings on these contributions or not.
If your modified AGI is less than 100,000 this year, you can roll this check over to a Roth IRA in a direct conversion, and $3796 will be taxable. That would get the after tax amount into a Roth on a tax efficient basis. However, you also have the option of rolling over the pre tax amount of the check to your TIRA and keeping the after tax amount in cash. There will be no taxable income for 2009 if you do this.
However, you did not mention mandatory 20% withholding. Based on how they handled this, 20% of $3796 should have gone to the IRS, requiring you to front this amount to complete either a Roth conversion or a TIRA rollover. This should have been clear on the statement
Permalink Submitted by C McDonald on Thu, 2009-02-26 15:54
To clarify, the $4816 represented contributions within a $22,724 employee after tax account…the amount above the $4816 was earnings. This amount seems to jive with my record keeping that goes back over 20 years and most likely represents a small pre-1987 contribution and subsequent earnings. The earnings on the $4816 were rolled along with the much larger 401k into an IRA. The $4816 was mailed as a check to me, which they gave me as an option, and the other was made out to my brokerage firm FBO me. I didn’t want to do a Roth and wanted to use the $4816 for living expenses at this point. Perhaps they have used the formula for the larger amount $22,724 against the $4816?
Alan, thanks for all your insight. Your posts are extremely informative for many of us.