Misdirected 401k rollover

Submitted by Larry Moran on Thu, 2014-02-13 01:39

Ok, big problem that is making me sick tonight. I have a client that we set up a Managed Money account for in 2011. This account was to receive 401k direct rollovers from three previous utilized accounts. Today I come to find out the Managed Money account I established for my client in 2011 was not set up as an IRA but rather an individually owned, non-qualified, account. How I made this mistake and how I have not recognized it previously I can’t explain.

My question is this: Can this be corrected in the eyes of the IRS? My Broker-Dealer has already told me they cannot do anything, it is past the 1-year window of opportunity.

I tried phoning the IRS but they are closed for the night. This is making me ill and I would very much appreciate any input, good or bad, that anyone can offer from experience or knowledge.

The monies “rolled over” totaled $162,000. There have been 1099-Divs generated since 2011 but today is the first time my client has brought it to my attention.

Thanks.



Submitted by Alan - IRA critic on Thu, 2014-02-13 02:01

  • What happened to the 1099R forms from the rollovers? Were rollovers reported on the appropriate returns? Do you know how the checks were made out? Perhaps the custodian has some liability in missing obvious signs that this was to be an IRA rollover. But this would just be a Plan B if the following point failed.
  • With respect to the client’s tax bill, this appears to be a typical case for a private letter ruling request to extend the 60 day rollover period to allow a retroactive IRA rollover to take place, and avoiding tax and penalty. PLRs are not cheap but probably worth the effort compared to tax and penalty on 162k in a single year. Along with IRS approval for the rollover perhaps voiding the 1099 DIVs could also be approved. There are 4 of these at the top of this PLR list.  IRS is usually sympathetic when client was not a party to the infraction.    http://apps.irs.gov/app/picklist/list/writtenDeterminations.html

Submitted by Larry Moran on Thu, 2014-02-13 10:51

Thanks for your help.  Two questions.  I’m confused interprering the wording of the PLRs.  The Service allows for the Waiver of the 60-day rule and indicates they will allow the original investment amount to now be moved into an IRA.  What I’m not clear about is the growth of that original investment.  In my case the $162,000 “rollover” has grown to $240,000.  In the cases given is the Service allowing for the full growth amount to be now placed into the IRA or just the original rollover amount ($162k)?  Finally, I’ve never had the experience of filing for a PLR.  You had mentioned they are not cheap.  Is there a cost paid to the IRS or is it just the cost of the tax preparer’s services?Thanks again.

Submitted by Alan - IRA critic on Thu, 2014-02-13 16:46

I don’t recall seeing any rulings where more than the original investment was allowed to be rolled over. However, if the 162,000 included any securities (rather than cash) that were transferred to the taxable account, those same securities including appreciation would be included in the rollover. The fee for a rollover over 100k I think is 3,000 but the legal costs would be around 5k or more. The time delay here may be an impediment. Here is the IRS link discussing these ruling requests:  http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-relating-to-Waivers-of-the-60-Day-Rollover-Requirement

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