After tax 401k contributions incorrectly rolled over to IRA
In 2001 a rollover of $179,000.00 401k (of which $70,000 was after tax 401k contributions) was incorrectly rolled into an IRA which purchased a variable annuity and was not separated at the time. How should distributions be taxed? What is the best way to correct this?
Permalink Submitted by Alan - IRA critic on Mon, 2018-11-26 20:22
After tax contributions could not be rolled into an IRA until 2002, so technically this was an excess contribution if it happened before 2002. Otherwise, Form 8606 should have been filed the first year an IRA distribution (from any non Roth IRA) was taken, adding the 70,000 of IRA basis on line 2. All IRA distributions would then be pro rated between the amount of basis and the total value of all non Roth IRAs.
Permalink Submitted by Patrick McMahon on Mon, 2018-11-26 20:48
If they were added in 2004 but an 8606 form was not completed then should the client amend a 2004 return? what is the best way to proceed?
Permalink Submitted by Alan - IRA critic on Mon, 2018-11-26 21:53
2004 is a closed year and correctly reporting the rollover on the 1040 would look no different than if there was no basis. IRS instructions, while making little sense, clearly indicate that they do not want an 8606 to be filed in the year of the rollover, but only when the next distribution ir taken or more basis is added to the IRA. In other words, when the next 8606 would otherwise be required, then the after tax rollover from any past year should be added to line 2 of the 8606. Since the IRS has been accepting late reporting of basis, the taxpayer should amend the 8606 for whatever year the basis should have been added to line 2. Another issue is whether distributions have been taken since 2004 that should have been taxed factoring in the 70,000, but were not. Has that also occurred?