Rollover error

Submitted by Robert Smith on Fri, 2020-10-30 18:55

Individual left his corporate job in 2013 and had a 401(k) for about $800,000 transferred out of that account with Fidelity to a new rollover account. It appears the new investment firm made a mistake.

There was pre-tax money and after-tax money in the 401(k) that rolled to the new IRA rollover account in 2013. He was instructed by email by the new firm that all the funds in the 401(k), both pre-tax and after-tax should go into one IRA. In the email, it said that Fidelity would likely tell him that the after tax money should go to a Roth IRA or a check to him. The email also stated that if Fidelity recommended this that they did not know the tax ramifications of doing so. And that they researched this thoroughly and the best decision is to roll everything, the pre and after-tax dollars, to the Rollover IRA

He will be divorcing soon and there will be a QDRO. He has asked the investment firm to correct the mistake.

The firm he rolled the money to will not make the correction.

Is that an acceptable response? Can it be corrected?



Submitted by Alan - IRA critic on Fri, 2020-10-30 20:11

  • Prior to Sept, 2014 when Notice 2014-54 was issued, there was considerable uncertainty regarding “isolation of basis” in rollovers. Therefore, different answers from different firms was a reality at that time. In any event altering the outcome of the rollover that was done is not possible at this late date, and what was done was not an error. It was a clearly (but not tax efficient) legal option at that time.
  • IRS instructions indicate that the first time an 8606 would otherwise be required on his TIRA, he should record the basis on line 2 of that form. The result is that all future distributions will be pro rated on Form 8606 ratably between the basis and the pre tax balance of all his non Roth IRA accounts.
  • An IRA is not transferred via a QDRO. The decree should contain language for a “transfer incident to divorce”. This is much simpler than a QDRO. In such a transfer, a pro rated amount of IRA basis would also be transferred out to the receiving spouse’s IRA. Each spouse would then file an 8606, the transferor showing a basis reduction, and the receiving spouse addition of basis as a result of the QDRO.

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