ETrade screws up classification of 401k rollover to Roth - what now?

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m2go
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ETrade screws up classification of 401k rollover to Roth - what now?

Post by m2go » Tue Oct 10, 2017 9:11 am

My wife and I both took a 401k in service distribution which we rolled over to our Roth IRA. However, E Trade coded it as 2016 contribution. We called them, and they claim they cannot change the forms that were issued (which have us make a Roth contribution for which we don't qualify, and we have no paperwork indicating we did deposit the rolled over funds.) They suggested to just keep the paperwork in case we get audited , or in another attempt tried to point finger by claiming that a rollover wasn't possible and it was our 401k provider's fault. (We've done this several time, so there certainly is an existence proof, and I know many here does this as part of the Mega backdoor Roth strategy.) They also just suggested we talk to our tax advisor. (We use tax cut... no advisor.)

What do we do now? Just keep docs? Wait till we're audited? Call again? Escalate to the Consumer Financial Protection Bureau?

Edit to add: They issue the tax form after the tax filing deadline. We haven't filed yet. We came across this as we scrubbed the return before submitting, going thru all the accounts and double checking all forms. What do we do with the firm if we proceed with a decision to treat it as having occurred correctly? I assume we'll immediately get a notice about overcontribution from the IRS?

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neurosphere
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Re: ETrade screws up classification of 401k rollover to Roth - what now?

Post by neurosphere » Tue Oct 10, 2017 9:28 am

I assume others will ask for more details to ensure the situation is understood completely prior to responding, and to help any readers who just wish to learn more about how things SHOULD work, and what kinds of mistakes can be made by custodians.

Where is the 401k, and where is the Roth IRA? I.e. same or different custodians?
Was this a "direct" rollover?
Did you receive a 1099-R? What was the code in box 7?
Did you receive form 5498 which reports this Roth "contribution" or other IRA contribution?
Did you do a backdoor Roth as well as the Mega backdoor Roth?

I assume when you wrote "they issued the tax form after" the deadline, that you are referring to the 5498? I believe this is always issued after the deadline, because IRA contributions for the previous tax year can be made up to the deadline. Or is there a different form you are referring to?
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

m2go
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Re: ETrade screws up classification of 401k rollover to Roth - what now?

Post by m2go » Tue Oct 10, 2017 10:13 am

To answer the detailed questions:

Q:Where is the 401k, and where is the Roth IRA? I.e. same or different custodians?
Different custodians. 401k is at Fidelity, Roth IRA at E-Trade.

Q: Was this a "direct" rollover?
Not sure I understand what you're asking?
a) Whether it was direct from 401k to Roth or via traditional? It was direct.
b) How the money moved? Into our respective bank accounts and deposited a check indicating it was a rollover

Q: Did you receive a 1099-R? What was the code in box 7?
Yes, we received form 1099-R. Reported as "gross distribution" in Box 1, Box 7 indicates "1 - Early distribution, no known exception"

Q: Did you receive form 5498 which reports this Roth "contribution" or other IRA contribution?
It shows a box 10 Roth contribution.

Q: Did you do a backdoor Roth as well as the Mega backdoor Roth?
Yes, we did both backdoor Roth and mega backdoor Roth.

Q: What form am I referring to.
Form 5498 issued by receiving institution.

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neurosphere
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Re: ETrade screws up classification of 401k rollover to Roth - what now?

Post by neurosphere » Tue Oct 10, 2017 10:59 am

m2go wrote:
Tue Oct 10, 2017 10:13 am
Q: Was this a "direct" rollover?
Not sure I understand what you're asking?
a) Whether it was direct from 401k to Roth or via traditional? It was direct.
b) How the money moved? Into our respective bank accounts and deposited a check indicating it was a rollover
You are saying the money from the 401k went straight to your checking account? In a typical direct rollover, 401k would have issued a check made out to E-trade, which you then would send to E-trade with instructions on what to do with it. In a 60-day rollover, the funds are payable directly to you, taxes withheld, and then you have 60 days to get that money back into an appropriate account.

https://www.irs.gov/retirement-plans/pl ... tributions

Which method did you use? Were any taxes withheld on the initial withdrawal?
m2go wrote:
Tue Oct 10, 2017 10:13 am
Q: Did you receive a 1099-R? What was the code in box 7?
Yes, we received form 1099-R. Reported as "gross distribution" in Box 1, Box 7 indicates "1 - Early distribution, no known exception"
Hmm. My in-service distribution with Schwab from last year has code "G" in box 7, signifying a "direct rollover" to a qualified plan. So it seems perhaps you did not do a direct rollover.

I'm not at all an expert on rollovers (actually, I only know what I've read here in the past on BH), but it seems you instructed E-trade that a check (made out from your personal checking account?) represented a rollover contribution. Was there a letter, form, or other communication you have a copy of which accompanied your check/transfer into the Roth? Did E-trade not follow your instructions?

You reference "paperwork" in your original post but say "we have no paperwork" but also that E-trade said to just "keep the paperwork". I assume the "no" is a typo? So what kind of documentation do you have?

NS

m2go
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Re: ETrade screws up classification of 401k rollover to Roth - what now?

Post by m2go » Tue Oct 10, 2017 12:22 pm

Q: Direct Rollover
A: Rollover was performed by receiving money into our account. Taxes were withheld. We then deposited a check clearly stating rollover into our Roth IRA, replenishing/making up for withheld taxes.

Q: Was there a letter, form, or other communication you have a copy of which accompanied your check/transfer into the Roth? Did E-trade not follow your instructions?
I handed the check and specified the purpose in the branch. I also wrote the purpose on the check and we have a copy of that check.
E-Trade did not follow the instructions.

Q: You reference "paperwork" in your original post but say "we have no paperwork" but also that E-trade said to just "keep the paperwork".
We did not get 5498 until after the filing deadline. That form is wrong as it indicates a 2016 contribution. It's not listed in the tax return as contribution, and if IRS adds up contribs, they'll see we're not eligible to do a straight Roth contrib.

So, the question is what now. They say they can't/won't fix the reporting. If we don't fix this, I think an audit is pretty certain. Is that something that we should wait for an audit. What can/should we do proactively? Escalate that they won't fix this via the CFPB?

Edited to Add: The tax return is not yet submitted. We discovered this as we're getting ready to submit the return prior to the extension deadline. We have some maneuvering room in adding info to the submitted return. We can't unwind and redo the thing, because that would require us to withdraw a 2016 contrib and all associated profits. If we didn't have to deal with the profits, we could just withdraw it, and deposit it with the the bubu rule: https://www.kitces.com/blog/rev-proc-20 ... ip-waiver/ - once money is comingled, it's both catastrophically difficult to disentangle, plus it's not clear in my mind why we should suffer the conseuqnce and penalties of overcontribution because E-Trade screwed up.

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Earl Lemongrab
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Re: ETrade screws up classification of 401k rollover to Roth - what now?

Post by Earl Lemongrab » Tue Oct 10, 2017 5:14 pm

m2go wrote:
Tue Oct 10, 2017 12:22 pm
Q: Direct Rollover
A: Rollover was performed by receiving money into our account. Taxes were withheld. We then deposited a check clearly stating rollover into our Roth IRA, replenishing/making up for withheld taxes.
That's an indirect rollover. You should not do that for 401(k)->IRA rollovers. If you had done a direct rollover, which is a check made out to the receiving custodian, then there would have been no withholding. You have to replace that withheld amount or tax and possibly penalty will be due on that. Did you? Are you over age 59-1/2?
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m2go
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Re: ETrade screws up classification of 401k rollover to Roth - what now?

Post by m2go » Tue Oct 10, 2017 7:19 pm

My problem relates to the wrong classification of deposits, not withholding of taxes. That's easy - just top up what is withheld, and it all evens out when you file taxes.

Specifically, the problem at hand is that E Trade categorized the rollover deposit as a 2016 normal contribution, despite me specifying this was a rollover contribution, and also writing it on the check. Now they assert they can't change how it is classified. What do I do with a misclassified rollover contrib.

So what now? Escalate to CFPB?

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neurosphere
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Re: ETrade screws up classification of 401k rollover to Roth - what now?

Post by neurosphere » Wed Oct 11, 2017 7:48 am

Reminder, I have no special knowledge/insight in these matters, but...

I'm wondering whether you try E-trade again. Have you sent them anything in writing regarding the problem, and have you received a response in writing? It sounds like so far everything has been verbal or over the phone?

Consider a letter which says something like "I gave you instructions to follow, and you did not follow them" and that you expect it to be fixed. That will force them to respond and state that either your instructions were not correct, or that they were correct but their mistake cannot be fixed in the way you want, etc. Their written response to you may help you in whatever the next steps turn out to be.

It sounds like you physically handed a check to a representative, with verbal instructions, and with something about a rollover written on the check. I'm not sure anything written on the check is going to be sufficient. And I'm not sure what happens in a he-said-she-said situation. :?
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

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Earl Lemongrab
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Re: ETrade screws up classification of 401k rollover to Roth - what now?

Post by Earl Lemongrab » Wed Oct 11, 2017 11:20 am

It puzzles me why people always want to do these things with a handshake and smile. Every major custodian has a form for any transaction. Find the form, fill it out, deliver it with the payment. Then there's no confusion about what you're doing.

It's often the first-line CS response that there's nothing that can be done. Always escalate. Never take "no". I like the phrase, "If you can't do it put me in touch with someone who can." Everybody works for somebody.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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neurosphere
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Re: ETrade screws up classification of 401k rollover to Roth - what now?

Post by neurosphere » Wed Oct 11, 2017 11:46 am

Earl Lemongrab wrote:
Wed Oct 11, 2017 11:20 am
It puzzles me why people always want to do these things with a handshake and smile. Every major custodian has a form for any transaction. Find the form, fill it out, deliver it with the payment. Then there's no confusion about what you're doing.

It's often the first-line CS response that there's nothing that can be done. Always escalate. Never take "no". I like the phrase, "If you can't do it put me in touch with someone who can." Everybody works for somebody.
Yes. For future Mega backdoor Roth transactions, the OP will ask the 401k provider to do a DIRECT rollover, with the check made out directly to the receiving custodian and Roth account, and include with the check to E-trade a letter and/or any suggested form which identifies the source of the funds as a qualified plan, the type of funds as after-tax (and any taxable amount or any earnings which are included). I think that lesson has been learned by the OP (and hopefully other readers can learn from this mistake too).

But for now, hopefully someone has some suggestions which may help the OP in the attempt to correct the misunderstanding with E-trade, or at least mitigate the consequences. :D
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

Alan S.
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Re: ETrade screws up classification of 401k rollover to Roth - what now?

Post by Alan S. » Wed Oct 11, 2017 1:37 pm

The E trade CSR is incorrect when they indicated that E Trade cannot fix this. The truth is that they CAN and should issue a corrected 5498 if they were responsible for the error. Unfortunately, once the tax forms are issued (5498 forms in May), it is more of a hassle to correct an incorrect form and their stance hardens into resistance. At this point, they would have to be clearly 100% responsible for the error for them to consider correcting the 5498 to Box 2 (rollover contributions). That said, if you feel that your documentation is reasonably clear, it is worth the effort to send the letter with a copy of your documentation as neurosphere recommended. Clearly ask them to correct the 5498 to Box 2. You might also advise E Trade that since you both also made regular TIRA contributions for back door Roth, their reporting in Box 10 creates an excess contribution and a 6% excise tax for you which will force you take corrective actions (these actions will also be a cost for E trade, more than simply correcting the 5498).

Meanwhile, go ahead and file your 2016 return reporting the 60 day rollovers on lines 16a and 16b of Form 1040 and your ND TIRA Contributions and conversions as usual. Be sure to keep a copy of the 1099R for about 7 years, and also a copy of the Roth activity statement showing the date and amount of the rollover contribution. If the IRS ever contacts you about the 5498 if E Trade refuses to correct it, you can present this data to the IRS to prove your point.

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