After tax 401k money put into pre-tax IRA
Client had after tax 401k money in 1993. It was then rolled over into a traditional IRA in 1993.
My questions
1) possible to have after tax money in 1993 before the Roth was invented. Maybe after tax contributions from the company?
2) We have great records that show all the transactions in the account since 93 and can show what moneys should have been after tax. What are the steps to move to a Roth?
2b) what are the pros and cons of those steps?
Permalink Submitted by Alan - IRA critic on Wed, 2022-05-11 02:40
What evidence is there that after tax money was rolled into an IRA? This was not allowed until 2002 and the plan would have issued a separate distribution check payable to client. If client then did a 60 day rollover to an IRA, it was an excess IRA contribution and if not removed would have generated an annual 6% excise tax each year since. GIven the length of time that has passed, client should probably just treat the IRA balance as taxable and do nothing, although the excess was probably corrected at some point by either not making a TIRA contribution they were eligible to make in some prior year or taking a distribution from the TIRA that was not rolled over. To be clear, there is no SOL for excess IRA contributions, but the IRS is not about to unearth this now.
Of course, it is also very possible that client’s documentation or recall is flawed, and the check was just cashed without making a disallowed rollover. Does client still have the 1993 tax return and 1099R forms?
Yet another possibility is that the money was used to fund a non deductible regular TIRA contribution that should have been reported on Form 8606 as such. Any current Roth conversions will be subject to Form 8606 pro rating.
Permalink Submitted by Steven Goodell on Thu, 2022-05-19 21:30
So to be clear. IF we could prove it was post tax we would have to pay a 6% excess penalty for each year to go back and correct the issue? That looks like 128k in this case, so we would follow your advise to just leave along.Could you provide more detail about your comment “not allowed unil 2002”. I am not sure how she got post tax moneys into her 401k in the early 90’s but is that at all possible?
Permalink Submitted by Alan - IRA critic on Thu, 2022-05-19 21:52
The following IRS link lists the changes made by EGTRRA (known as the Bush tax cuts), effective in 2002. Toward the end there is a portability improvement list that includes after tax contributions. Portability is the term to describe rollovers from one plan to another.
Retirement Plans FAQs regarding Plan Language Issues for GUST and EGTRRA | Internal Revenue Service (irs.gov)
If she did get this post tax money into an IRA, the custodian did not know it was post tax or they would not have accepted it. Since these rollovers were not allowed prior to 2002, an employer plan always issued a separate check for the after tax 401k money payable to the participant. It was never included in any direct rollovers. There would also have been a separate 1099R for the after tax check (But no taxable amount) if the rest of the account was directly rolled over.