Possibility of correcting rollover mistake
Client retires early at age 59. Rolls over 401k to brokerage account(s). 100k already taxed 300k pre tax. Two checks issued. Brokerage account opens rollover ira for the pretax, but the after tax is put into a non-qualified brokerage account. If they had put the funds in an IRA he could have converted to a Roth next year (income way to high this year). Am I correct in my thinking? Can this be undone? The client had mentioned this to the discount brokers, but they either ignored or there was miscommunication. He would like to be able to convert to a Roth if that is possible? If I am correct, can this be undone. It happened about 3 months ago (well beyond the 60 day limit).
Permalink Submitted by Joseph Arsenault on Tue, 2009-12-01 21:11
Unfortunately there is no way to put that money in an IRA. Your client should have used the 60-day rollover provision to deposit the after-tax money in an IRA. If he would have put the money in an IRA, and waited until 2010 because of his income, he still would not of been able to cherry-pick the after-tax basis for conversion purposes. Because the basis was 25%, only 25% of any amount converted would be excluded from gross income.
I would think the only other option is to ask the custodian to redeposit the money and cancel the initial transaction (not issue a 1099) but this sounds like it would be very unlikely. In-fact, I am not sure if the custodian can even legally do this, although I have seen custodians “cancel outstanding checks” and cancel the distribution.
There are some other people here that also seem to have much experience in this area so perhaps they have some better suggestions.
-J
Permalink Submitted by Anonymous (not verified) on Tue, 2009-12-01 23:46
If this request was in writing and clearly specifying the IRA (and not the retail brokerage) you have a clear case. ELEVATE this to the highest levels of that company. Note, this includes refering to recorded conversations, etc. I would fight this all day long…..
On the other hand, as monsta says: The pro rata mess when converting is also something you have avoided.
pmk