Inherited 401k

Submitted by Steve Ragla on Mon, 2018-12-03 20:26

I’ll try make this as clear as possible. When my brother passed away a few year ago I was the beneficiary of his 401k. I rolled over the 401k to a inherited ira. At the time of the rollover the administrator told me that there was a few thousand dollars of after tax money that would be paid out with the rest of the money being before tax that would be rolled to the ira. I have recently found paper work that states that a significant amount of the 401k was in after tax money….Do I have anyway of fixing this? I would think that the after tax portion should have been paid out. This to me is double taxation. Thank you.



Submitted by Alan - IRA critic on Mon, 2018-12-03 23:25

  • Yes, you can fix it going forward. When you took your first RMD from the inherited IRA, you should have filed Form 8606 and reported the after tax amount rolled over on line 2 of Form 8606. That would have resulted in a pro rated amount of your distributions being non taxable. You can amend your 2015-2017 returns to do this and receive a refund. You cannot go back farther than 2015 since those tax years are closed. The deadline to amend your 2015 return will be 4/15/2019. 
  • Form 8606 will show the amount of IRA basis remaining on line 14. That figure is brought forward to line 2 of the following year, so you need to file these returns in order starting with 2015.
  • For years prior to 2015, you will still recover some of that basis but gradually over the years starting with 2015 onward instead of when you filed those pre 2015 returns. Therefore, most of the after tax money will eventually not be double taxed.
  • You could not have had the after tax amount paid out separately except for any portion contributed before 1987. However, if you did the IRA rollover after Sept, 2014 you could have requested a split direct rollover with the after tax amount sent to an inherited Roth IRA (pre tax amount to an inherited traditional IRA). That would have been better than recovering the basis gradually from here on it, but at least you can do some damage control now.
  • When filing the 1040X for 2015, you should include an explanatory statement in the blank box explaining that you rolled over after tax money from the inherited 401k. If you have any statements or other documents verifying the after tax amount, keep that at least 5 years in case the IRS asks for documentation.

Submitted by Steve Ragla on Tue, 2018-12-04 03:14

Thank you very much for the very clear and thorough explanation of how to fix my 401k problem. Again, thank you!

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