IRA vs 401k & 403b money

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mrc
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IRA vs 401k & 403b money

Post by mrc »

Thinking about form 8606, tracking non-deductible contributions to a traditional IRA. No Roth conversions involved.

Many years ago I contributed to a 403b/401a plan while working at a university. After leaving the university in 1995, I always participated in new employers’ 401k plans. I made maximum contributions to the 401k, and along the way became ineligible to contribute to a Roth because of income limitations. So in 2003, I started a stand-alone traditional IRA. Over the years I made about $25K in non-deductible contributions to the IRA. In 2014, I rolled over funds from the 401a/403b into the IRA. This year, I rolled the funds from the IRA back into the 403b.

So I notice form 8606 asks the amount of your non-deductible contribution, the total value of the IRA, and computes a pro-rata tax free amount on IRA withdrawals. If I had kept the IRA funds completely separate, I would have contributed $25K to an account now worth about $40K. But because I rolled over funds (twice), I have now contributed $25K to an account worth $130K. And it’s not even an IRA, SEP, or SIMPLE (per the 8606 form).

I plan to roll over current employer 401k to the same 403b when I leave service. That would make the $25K part of an $850K balance.

It seems that IRAs are distinct animals from 401k/403b in more ways that I was aware.

By doing the rollovers, did I dilute or even wipe out future deductibility?
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

It sounds to me like you have an IRA worth $40k that has a basis of $25k. All your other money is in the 401k/403b, right?
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mrc
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Re: IRA vs 401k & 403b money

Post by mrc »

I realized, I have no IRA at this point. I've rolled over 403b funds into the IRA, then back again to the 403b. This didn't even dawn on me until this morning. I'm wondering if I take distributions from the 403b if form 8606 (IRA) even applies?
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

Did you roll the non-deductible contributions into the 403b as well?

Non-deductible contributions are not supposed to be rolled into a 403b. I do not know if there is a fix for this or not. Since you did it this year, maybe it is not too far back to fix it.

The Form 8606 does not apply to your 403b, only an IRA. I assume, if you can't fix this, you will pay tax on that $25k a second time when you withdraw money from the 403b.

A common sense approach, not a suggestion since I don't even know if this is legal, would be to roll out the exact amount that is documented on your Form 8606. Roll that to tIRA. Then convert it immediately to Roth IRA. Or maybe roll it directly to Roth IRA, I'm not sure.

I think either way the basis documented on the Form 8606 would offset the rollover/conversion and no tax would be owed.
Topic Author
mrc
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Re: IRA vs 401k & 403b money

Post by mrc »

Thanks retiredjg. Clearly the custodians don't pay attention to the color of the money because no one mentioned this during the rollover process! I will pull out the exact amount of non-deductible contributions from the 403b into a new tIRA (where it should have been placed to begin with).

Then I’ll transfer those funds into my (existing) Roth as a back door conversion. I had no intention of pursuing a back door Roth, primarily because I had an existing tIRA with mostly pre-tax funds.

I believe this is the best approach for the portfolio, I should not pay tax twice. And it feels legit because I should have split the rollover into the 403b and tIRA in the first place. And that would leave an IRA with only non-deductible funds.
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

I think that is what I'd do. It seems like you are just correcting the mistake once you realize you have made it.

The custodian has no idea if the money you are rolling over was deducted from your taxes or not. At some point, you may have have inadvertently told them the money was all pre-tax - small print maybe, I don't know. Doesn't matter much though. Seems like that fix should work.
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Earl Lemongrab
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Re: IRA vs 401k & 403b money

Post by Earl Lemongrab »

mrc wrote:Thanks retiredjg. Clearly the custodians don't pay attention to the color of the money because no one mentioned this during the rollover process! I will pull out the exact amount of non-deductible contributions from the 403b into a new tIRA (where it should have been placed to begin with).

Then I’ll transfer those funds into my (existing) Roth as a back door conversion. I had no intention of pursuing a back door Roth, primarily because I had an existing tIRA with mostly pre-tax funds.
I don't think that will work. Once the non-deductible amounts got into 403(b) they became pretax. That's because the law says only pretax can be rolled in. You could contact the custodian and see if there is anything they can do to "undo" the rollover, but I doubt it.

When you take the distribution from the 403(b) the 1099 will probably indicate 100% taxable, and that's what the IRS will use, so just filling out 8606 probably won't help.

Earl
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

I think what you are saying is right. But the basis still stands until it is used. So money rolled out (even if it is considered pre-tax) could be converted to Roth without paying tax because of the basis that is documented on the Form 8606.

Am I missing something?
Katietsu
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Re: IRA vs 401k & 403b money

Post by Katietsu »

Yes. I think you are missing something. I would not be comfortable with your plan.

You need to see if you can get the $25000 in a manner analogous to removing excess contributions. In other words, this is a correction since the money was not permitted to go there in the first place. I would want that documented.
Topic Author
mrc
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Re: IRA vs 401k & 403b money

Post by mrc »

Update:

The custodian that now has the money wants the original custodian to send them an indemnity letter and a request to reverse the rollover. Then do the rollover again with two separate checks.

The original custodian is researching that now. Not sure it's going to happen though.

I sure wish I would have thought about this before I made the rollover.
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

mrc wrote:The custodian that now has the money wants the original custodian to send them an indemnity letter and a request to reverse the rollover. Then do the rollover again with two separate checks.
Thanks for the update. I was wondering how this would work out.

What do you mean "do the rollover again with two separate checks?"
Topic Author
mrc
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Re: IRA vs 401k & 403b money

Post by mrc »

If, and that may be a big if, I can get the funds back into the original IRA I will start over. I will do a rollover for a dollar amount to a new IRA. This will be the after-tax money. Neither custodian cares about the color, but I'll have an 8606 form and a rollover confirmation for a new IRA (not a 403b). Then, I'll roll the remaining funds in the original IRA into the 403b, all pre-tax.
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

I'll be interested in hearing what eventually happens.
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mrc
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Re: IRA vs 401k & 403b money

Post by mrc »

Original custodian cannot act: They claim they transferred the funds to the new custodian as directed, and have no string to pull to reverse the rollover. I tend to agree. The ball is back in new custodian's court to re-characterize the transferred funds properly. I submitted supporting paperwork (original custodian IRA statements and 5498s, IRS 8060s) to move after-tax amount to IRA. This likely isn't an obvious, easy, or routine adjustment. It's certainly not automated. We will see.

I'm surprised this doesn't happen to people more often. Perhaps it does, and people are unaware? :oops:
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

I think it probably happens more often than people realize. You are lucky you realized it this quickly and actually have paperwork to back up what has occurred.

I agree that the original custodian has no options to act. Do let us know what the current custodian does.
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mrc
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Re: IRA vs 401k & 403b money

Post by mrc »

With support from the folks on this site, and after several conversations with both custodians, along with some very dry IRS publication reading … this is resolved.

In the end, I rolled over an exact dollar amount (the after-tax contributions) from the 403b to a new IRA. Both accounts are at the new custodian. A note on the IRA confirmation was quite a relief: The Investment in the Contract is the contributions made with after-tax dollars

Had I been more aware, I would have performed two separate rollovers, one exact dollar amount into the (new) IRA for the after-tax monies, and the remainder 100% (all pre-tax monies) into the 403b. In this case, the end result is the same. I still can’t get over how easy this is to do (wrong).

Next stop: Back door Roth. Going to take a week or so and enjoy the calm.

Thanks so much for the support.
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

I'm glad it worked out so easily for you. Could have been a nightmare. Good luck with the paperwork you have to do next tax season!
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Re: IRA vs 401k & 403b money

Post by Alan S. »

mrc wrote:With support from the folks on this site, and after several conversations with both custodians, along with some very dry IRS publication reading … this is resolved.

In the end, I rolled over an exact dollar amount (the after-tax contributions) from the 403b to a new IRA. Both accounts are at the new custodian. A note on the IRA confirmation was quite a relief: The Investment in the Contract is the contributions made with after-tax dollars

Had I been more aware, I would have performed two separate rollovers, one exact dollar amount into the (new) IRA for the after-tax monies, and the remainder 100% (all pre-tax monies) into the 403b. In this case, the end result is the same. I still can’t get over how easy this is to do (wrong).

Next stop: Back door Roth. Going to take a week or so and enjoy the calm.

Thanks so much for the support.
Questions remain.
You mentioned contributing "about 25k" in non deductible TIRA contributions in the past. Did you file an 8606 to report all these contributions? Your latest 8606 should show an exact amount. This amount was then rolled into the 403b which is not allowed. Did the 403b then issue a direct rollover of this same amount to your TIRA? Or did they send you a check and then YOU did the IRA rollover? Was the amount identical to your basis on Form 8606 or was it more or less?

Whatever the 403b did, the outcome with respect to your 2016 tax return depends on the 1099R that the 403b will issue in January. If you can find out now what will show in the boxes on that 1099R, you will know now where you stand and whether you should proceed to convert. It may be tough to get a definite answer from the plan before their tax Dept parses through all this and determines the 1099R entries, so you could remain in limbo till late January. Note that if Code E ends up in Box 7 of that 1099R, any distribution you received is not eligible for rollover to your IRA. Therefore, you would hope that a direct rollover was done to the TIRA, rather than a corrective distribution to you that is coded E and therefore is not eligible for rollover.

Put another way, the 1099R will determine whether a rollover to an IRA is possible. If not, then you have an excess IRA contribution, any conversion you do will have to be recharacterized back to TIRA, and the excess IRA contribution plus any earnings would have to be distributed from the TIRA to you.
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mrc
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Re: IRA vs 401k & 403b money

Post by mrc »

Thanks for the heads up on this year’s 1099R.
Alan S. wrote:Questions remain.
You mentioned contributing "about 25k" in non deductible TIRA contributions in the past. Did you file an 8606 to report all these contributions? Yes.

Your latest 8606 should show an exact amount. This amount was then rolled into the 403b which is not allowed **. Did the 403b then issue a direct rollover of this same amount to your TIRA? Yes.

Or did they send you a check and then YOU did the IRA rollover? Direct. No check.

Was the amount identical to your basis on Form 8606 or was it more or less? Identical.

Whatever the 403b did, the outcome with respect to your 2016 tax return depends on the 1099R that the 403b will issue in January. If you can find out now what will show in the boxes on that 1099R, you will know now where you stand and whether you should proceed to convert. It may be tough to get a definite answer from the plan before their tax Dept parses through all this and determines the 1099R entries, so you could remain in limbo till late January. Note that if Code E ends up in Box 7 of that 1099R, any distribution you received is not eligible for rollover to your IRA. Therefore, you would hope that a direct rollover was done to the TIRA, rather than a corrective distribution to you that is coded E and therefore is not eligible for rollover.

Put another way, the 1099R will determine whether a rollover to an IRA is possible. If not, then you have an excess IRA contribution, any conversion you do will have to be recharacterized back to TIRA, and the excess IRA contribution plus any earnings would have to be distributed from the TIRA to you.
The supporting documents I uploaded (letter of instruction, 8606s, 5498s, and the telephone conversations were specific: This was after-tax money, rolled into the 403b by mistake, I want to preserve the original IRA's after tax basis, not pay taxes twice, and place the monies in a new tIRA.

The forms used were direct rollovers, and there were no corrective distributions. The confirmation states:

Distribution type: Internal Rollover

Payment method: Rollover

Your internal transfer, rollover or Roth in-plan conversion has been processed as shown below.

The Investment in the Contract [their working for the new tIRA] is the contributions made with after tax dollars.

** Is the contention that a 403b cannot ever hold after-tax monies? I thought I read where some can, in:
IRS pub 571 wrote: How Can Contributions Be Made to My 403(b) Account?

Generally, only your employer can make contributions to your 403(b) account. However, some plans will allow you to make after-tax contributions (defined below).

The following types of contributions can be made to 403(b) accounts.

Elective deferrals. ...

Nonelective contributions. ...

After-tax contributions. These are contributions (that are not Roth contributions) you make with funds that you must include in income on your tax return. A salary payment on which income tax has been withheld is a source of these contributions. If your plan allows you to make after-tax contributions, they are not excluded from income and you cannot deduct them on your tax return.
It SEEMS I am good.
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

mrc wrote:** Is the contention that a 403b cannot ever hold after-tax monies? I thought I read where some can, in:
IRS pub 571 wrote: How Can Contributions Be Made to My 403(b) Account?

Generally, only your employer can make contributions to your 403(b) account. However, some plans will allow you to make after-tax contributions (defined below).

The following types of contributions can be made to 403(b) accounts.

Elective deferrals. ...

Nonelective contributions. ...

After-tax contributions. These are contributions (that are not Roth contributions) you make with funds that you must include in income on your tax return. A salary payment on which income tax has been withheld is a source of these contributions. If your plan allows you to make after-tax contributions, they are not excluded from income and you cannot deduct them on your tax return.
It SEEMS I am good.
No. The contention is that you cannot roll after-tax money from an IRA into a 401k/403b. That is different from contributing to an after-tax account in a 401k/403b that allows after-tax accounts.
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mrc
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Re: IRA vs 401k & 403b money

Post by mrc »

OK. I see the difference now with respect to the 403b contrib vs rollover.

I believe what the new custodian did was the equivalent of backing out the original rollover into the 403b, and accepting the original incoming rollover in two parts: separating the pre-tax and after tax monies. The pre-tax went into (stayed in) the 403b, and the after tax went into the tIRA. They certainly know my intentions. If the 1099s don't bear that out, I'll have to deal with it then. In the meantime, I'm thinking I should stand down on the tIRA to Roth conversion in 2016.
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

Good luck. Hope there is no tale of woe when you do your taxes next year!
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mrc
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Re: IRA vs 401k & 403b money

Post by mrc »

Update

To recap, I moved an IRA (with both after-tax and pre-tax contributions) from one custodian to another, and mistakenly placed all of the moved funds in an existing 403(b). [The 403(b) plan allows incoming transfers.]

I should have initiated two separate transfers, one in the amount of the after-tax contributions, and the other for the remainder of the funds. The former should have gone into a tIRA, the latter into the 403(b). Then I should have performed a back door conversion of the tIRA into an existing Roth.


To recover, I asked the new custodian to move the after-tax contributions from the 403(b) to a tIRA, with a letter of explanation. And I filed amended 8606 forms for the last 3 years with the IRS. Like many, when TurboTax asked "did you make any contributions to an IRA" I did not understand exactly what I was doing. Nothing deductible, so who cares, right?

I now have all the 1099s from both custodians. The box codes and amounts all line up properly — two with (G) Direct rollover, and one with (2) Early distribution (except Roth), exception applies). The "taxable" amount shown on the 1099 with code (2) is covered by the 8606's basis.

I converted the tIRA to Roth early this year. So now, I can file a clean 1040 this year, all after-tax contributions are in a Roth, the tIRA balance is zero. One more tax return for the back door conversion remains. But the paperwork is on track. And I remain hopeful I don't hear from the IRS!

Thanks to the board for all the support. And hopefully a lesson to those that can't contribute directly to a Roth to watch those TurboTax questions, and properly maintain your 8606 balances!
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retiredjg
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Re: IRA vs 401k & 403b money

Post by retiredjg »

Good to hear it worked out without too much difficulty!
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