After Tax money in 401(k) rolled into IRA
A previous advisor rolled $100k of after tax money from client’s 401(k) into an IRA. The intention of the client was to use this money prior to withdrawing from qualified money. Advisor had previously mentioned rolling to seperate account (would have been much easier). Client does not want to take pro-rated withdrawals and keep up with basis forever. We are exploring E&O claim (advisor deceased) in order to seperate this money out.
- What would the best solution have been to begin with?
- Is there any remedy aside from E&Oing the effective tax to seperate the money for withdrawal?
Permalink Submitted by Alan - IRA critic on Tue, 2024-04-30 17:28
The easiest solution if the client is still working and has a 401k that will accept rollovers from IRAs is to roll the entire pre tax IRA balance into the 401k, then convert the remaining IRA basis to a Roth tax free.
Client should file an 8606 to report the after tax basis in the IRA for the first year that an 8606 would otherwise be required.
The advisor should have done a split rollover per Notice 2014-54, sending the pre tax balance to a TIRA and the 100k after tax balance to a Roth IRA. Client could then have taken Roth IRA distributions up to 100k tax and penalty free as needed, allowing client to draw done the after tax money first even if the Roth IRA was not yet qualified.
An E&O suit would be very costly, could take a considerable time, and given the limited potential damages probably not worth pursuing.
I assume that the after tax money formerly in the 401k was NOT Roth money.
Permalink Submitted by Jennifer Kevitt on Thu, 2024-05-16 19:13
Would you take a different approach to correcting this if the money formerly in the 401k was, in fact, Roth money and NOT after tax money? Thank you!