401(k) rollover with after-tax dollars

Submitted by Steve Matson on Tue, 2017-09-19 20:31

I completed a 401(k) rollover early in the year for a retired employee. The 401(k) distribution included 2 checks,a pre-tax and a after-tax. The client requested the rollover online and listed the financial institution for the rollover. Both checks were made out to the order of the custodian FBO clients name and had the same IRA account number . I opened up a traditional IRA and a Roth IRA for the checks to go into. The Broker put them both into the traditional IRA. I have ask the broker to fund the Roth with the after-tax amount but they tell me their hands are tied. I have copies of the transaction confirmations and both checks, and a letter from the client requesting the Roth and not all the monies in the traditional. Once the broker received the checks they wrote the traditional account number on both checks. The after-tax money is still sitting in cash in the Traditional IRA. Is there anything I can do to correct this rollover?



Submitted by Alan - IRA critic on Tue, 2017-09-19 22:03

The after tax check should have been returned to the plan and re issued with the payee as client’s Roth IRA FBO client.  Forwarding the check with the wrong payee to the IRA custodian was bound to create this mess, for which there is no template to fix unless perhaps the 401k plan assumes responsibility for showing the wrong IRA account on the after tax check. Otherwise, the IRA custodian is likely to take the position that no error was made by them. Note that is some cases where an amount (eg from a Roth 401k) is rolled into a TIRA which is NOT eligible to receive Roth money, more pressure can be exerted on the IRA custodian to correct the error. But in this case, after tax 401k money (non Roth) is eligible for a rollover to a TIRA, so this argument cannot be used. I would ask to speak to supervisory staff at the IRA custodian, since the documentation you already have should be enough for them to make the changes. It is not that difficult for them to do from now to year end, but after 2017 IRS tax reporting will be impacted and the changes of resolving it then are much lower.

Submitted by Ben Meyer on Thu, 2017-09-21 03:24

If the IRA custodian can’t be convinced to make a correction, the 401(k) plan might permit a pretax rollover from the IRA into the 401(k), assuming they will accept a rollover from a retiree and have not yet closed the 401(k) account.  The total amount of the pretax balance only should be rolled over from the IRA to the 401(k).  If there are any other traditional IRAs, the pretax balance should also be rolled over from those accounts.  Rollovers from an IRA to a 401(k) are assumed to deplete the IRA pretax balance first.  With the pretax balance of the IRA all rolled into the 401(k), the IRA will consist of all after-tax basis.  A Roth conversion of the IRA can then be performed with only a very small amount of tax due, from any earnings after the rollover to the 401(k).  Then, next year another rollover can be performed from the 401(k) to the traditional IRA.  This time the rollover will be totally pretax funds.

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