Traditional IRA conversion/Roth back door

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noobtoinvesting
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Traditional IRA conversion/Roth back door

Post by noobtoinvesting » Tue Apr 24, 2018 11:09 pm

Hey guys,
Last year I rolled over traditional IRA to current employer 401k,
Some of the fund were post tax (non deductible contribution from previous year) And rest were pre-tax. When I roller over from Schwab, I rolled the entire amount in one transaction but on the receiving side (401k) they accepted the pre-tax fund into regular 401k and post-tax funds into roth 401k (it shows as "rollover Roth"). 1099 form from Schwab shows direct rollover for entire the entire amount. Just one 1099 form from Schwab
My dilemma is how to show this to IRS??
As far as I understand I converted my post tax (non deductible contribution) to Roth and rest rolled over to 401k

Any input or help is appreciated.

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FiveK
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Re: Traditional IRA conversion/Roth back door

Post by FiveK » Wed Apr 25, 2018 3:19 am

Do the instructions for Lines 15a and 15b - IRA Distributions help?

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Earl Lemongrab
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Re: Traditional IRA conversion/Roth back door

Post by Earl Lemongrab » Wed Apr 25, 2018 12:00 pm

Wow. That was not a legal rollover. The IRS publications make it clear that you can't roll after-tax IRA amounts to a qualified plan. It's hard to believe the plan knowingly accepted those.
You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. These plans include the Federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Qualified plans may, but aren’t required to, accept such rollovers.
https://www.irs.gov/publications/p590a# ... 000230575

You're not allowed to roll Roth IRA amounts either.

I've never heard of a plan doing this, so I can't even advise.
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noobtoinvesting
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Re: Traditional IRA conversion/Roth back door

Post by noobtoinvesting » Wed Apr 25, 2018 1:26 pm

Employer has two plans, one for traditional 401k and also Roth 401k.

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Earl Lemongrab
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Re: Traditional IRA conversion/Roth back door

Post by Earl Lemongrab » Wed Apr 25, 2018 1:29 pm

noobtoinvesting wrote:
Wed Apr 25, 2018 1:26 pm
Employer has two plans, one for traditional 401k and also Roth 401k.
So? You aren't allowed to roll non-deductible or Roth IRA amounts into a qualified plan. It's against the law.
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FiveK
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Re: Traditional IRA conversion/Roth back door

Post by FiveK » Wed Apr 25, 2018 1:41 pm

See the last column in https://www.irs.gov/pub/irs-tege/rollover_chart.pdf regarding Earl's point.

HEDGEFUNDIE
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Re: Traditional IRA conversion/Roth back door

Post by HEDGEFUNDIE » Thu Apr 26, 2018 12:42 am

Just out of curiosity, if you have basis in a Traditional IRA, would it be possible to rollover just the pre-tax IRA money into a 401k?

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FiveK
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Re: Traditional IRA conversion/Roth back door

Post by FiveK » Thu Apr 26, 2018 1:31 am

HEDGEFUNDIE wrote:
Thu Apr 26, 2018 12:42 am
Just out of curiosity, if you have basis in a Traditional IRA, would it be possible to rollover just the pre-tax IRA money into a 401k?
Yes, you may rollover all the pre-tax amount into a 401k (if the 401k plan allows) but no more than that.

ivk5
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Re: Traditional IRA conversion/Roth back door

Post by ivk5 » Thu Apr 26, 2018 1:59 am

noobtoinvesting wrote:
Tue Apr 24, 2018 11:09 pm
1099 form from Schwab shows direct rollover for entire the entire amount. Just one 1099 form from Schwab
Is the "taxable amount not determined" box checked?

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Earl Lemongrab
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Re: Traditional IRA conversion/Roth back door

Post by Earl Lemongrab » Thu Apr 26, 2018 10:59 am

HEDGEFUNDIE wrote:
Thu Apr 26, 2018 12:42 am
Just out of curiosity, if you have basis in a Traditional IRA, would it be possible to rollover just the pre-tax IRA money into a 401k?
Yes. If you look at IRS publication 590, it explains the "special rule" that allows you avoid pro-rated distributions for that purpose.
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celia
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Re: Traditional IRA conversion/Roth back door

Post by celia » Thu Apr 26, 2018 11:11 am

I'm not sure on this, but my understanding is that if the custodian knowingly accepts post-tax contributions, that jeopardizes the whole plan (from the IRS perspective). When the custodians find out about this, they are anxious to fix it, from past posts on the forum. (Possibly the 401K custodian thought you were converting some pre-tax money to Roth while doing the roll-over.)

I suggest that the OP contact the plan and clarify what happened and follow their instructions.


It is recommended to roll the non-deductible part (post-tax) of the tIRA to a Roth IRA. This will also facilitate the ability to do future backdoor Roths. While you are at it, see if the 401K custodian will allow you to roll all of the Roth 401K to a Roth IRA, should you have other direct contributions into the Roth 401K. If the original rollover check was made out to you instead of the 401K custodian, you need too be very careful since you are only allowed to do one indirect rollover (check made out to you) every 365 days without incurring a large penalty. The 401K custodian should instead send the money directly to your Roth IRA.

If you haven't filed your 2017 taxes yet, you should clean this up first. Your taxes will likely need to include an explanation of what happened since the 1099-R you received actually covered two transactions: an eligible one and an illegible one. Without an added explanation, nothing you put on your tax forms will be correct as far as this transaction (because the IRS doesn't have a way to report an ineligible transaction). Please ask for clarification, if this is not clear.

noobtoinvesting
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Re: Traditional IRA conversion/Roth back door

Post by noobtoinvesting » Tue May 01, 2018 12:56 am

ivk5 wrote:
Thu Apr 26, 2018 1:59 am
noobtoinvesting wrote:
Tue Apr 24, 2018 11:09 pm
1099 form from Schwab shows direct rollover for entire the entire amount. Just one 1099 form from Schwab
Is the "taxable amount not determined" box checked?
No, total distribution is checked

noobtoinvesting
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Re: Traditional IRA conversion/Roth back door

Post by noobtoinvesting » Tue May 01, 2018 1:14 am

celia wrote:
Thu Apr 26, 2018 11:11 am
I'm not sure on this, but my understanding is that if the custodian knowingly accepts post-tax contributions, that jeopardizes the whole plan (from the IRS perspective). When the custodians find out about this, they are anxious to fix it, from past posts on the forum. (Possibly the 401K custodian thought you were converting some pre-tax money to Roth while doing the roll-over.)

I suggest that the OP contact the plan and clarify what happened and follow their instructions.

It is recommended to roll the non-deductible part (post-tax) of the tIRA to a Roth IRA.

that's where i made mistake. i should have just convert that $5500 to roth and then send rest to 401k

This will also facilitate the ability to do future backdoor Roths.

While you are at it, see if the 401K custodian will allow you to roll all of the Roth 401K to a Roth IRA, should you have other direct contributions into the Roth 401K. How do i do that?? just ask them if they can rollover roth 401k to my current roth IRA account?? I do not have any other 401k Roth contribution.

If the original rollover check was made out to you instead of the 401K custodian, you need too be very careful since you are only allowed to do one indirect rollover (check made out to you) every 365 days without incurring a large penalty.
No It was a direct rollover, 1099 form has G under distribution code

The 401K custodian should instead send the money directly to your Roth IRA.

If you haven't filed your 2017 taxes yet, you should clean this up first. Your taxes will likely need to include an explanation of what happened since the 1099-R you received actually covered two transactions: an eligible one and an illegible one. Without an added explanation, nothing you put on your tax forms will be correct as far as this transaction (because the IRS doesn't have a way to report an ineligible transaction). Please ask for clarification, if this is not clear.
I have not filed my tax return,
I have called my 401k custodian a million times to send me back that $5500 but they refused to do that, i even send them 8606 form, 1040 and actual transaction on the Trad IRA account to show non-deductible part but instead they put money into roth 401k

I will call my current 401k custodian tomorrow to find out more

Thanks you guys
Last edited by noobtoinvesting on Sat May 12, 2018 12:15 am, edited 1 time in total.

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Earl Lemongrab
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Re: Traditional IRA conversion/Roth back door

Post by Earl Lemongrab » Tue May 01, 2018 9:53 am

celia wrote:
Thu Apr 26, 2018 11:11 am
If the original rollover check was made out to you instead of the 401K custodian, you need too be very careful since you are only allowed to do one indirect rollover (check made out to you) every 365 days without incurring a large penalty. The 401K custodian should instead send the money directly to your Roth IRA.r.
This is incorrect. The one rollover rule only applies to indirect rollovers between like IRAs. Nothing with 401(k)s is a problem.
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noobtoinvesting
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Re: Traditional IRA conversion/Roth back door

Post by noobtoinvesting » Sun May 13, 2018 5:15 pm

update

I called 401k custodian again and asked to speak to supervisor, initially PSR refused to transfer as there is nothing that she think her manager can do in my case to fix it but i did not take no for an answer and after 30 mins on phone with her asking to speak supervisor finally i got her supervisor. Last time( in Dec) i tried to do the same but instead they transferred to "investment advisor" who made the thing worst ( rolled post tax into roth 401k)

anyhow, now 401k custodian wants to do "reversal" but my trad IRA (original IRA account) will not correct the 1099 form from 2017, and because of that 401k custodian is looking into doing direct rollover back to original trad IRA. ( not sure the details, @issuing 1099 for 2018)

another problem is that 401k custodian do not know what do with gains as they have money in roth 401k and $5500 became $5700. they are thinking abt doing direct rollover including gain ($5700) back to original Trad IRA. any problem with them doing this @IRS or for me? my guess is once they rolled back to my original tIRA, I have to convert the entire fund ($5700) in 2018 to roth and pay tax on gain ($200) which i will report on 8606. please correct me if i am wrong.

PS: I have not file my tax return yet.

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celia
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Re: Traditional IRA conversion/Roth back door

Post by celia » Sun May 13, 2018 6:03 pm

noobtoinvesting wrote:
Sun May 13, 2018 5:15 pm
anyhow, now 401k custodian wants to do "reversal" but my trad IRA (original IRA account) will not correct the 1099 form from 2017, and because of that 401k custodian is looking into doing direct rollover back to original trad IRA. ( not sure the details, @issuing 1099 for 2018)
That's great that the 401K custodian is now willing to correct this. (Lesson learned: Go up the chain of command when the person on the phone doesn't fully understand the situation.) You are not the first person who has made a mistake like this, nor will you be the last.

Ask the 401K custodian to rollover the entire Roth 401K back to your tIRA. That will clean up the error. Then convert the entire traditional IRA to a Roth IRA (so that you are eligible to do future backdoor Roths).

You already have a 1099-R for 2017 that you need to report on your 2017 taxes, as is. There is no tax consequence for this.

Then for 2018, you will get a 1099-R for the rollover back to the tIRA (with an unknown distribution code you would enter into the software) and a 1099-R for the Roth conversion. (After the dust settles, if you then do a backdoor Roth this year, the Roth conversion 1099-R will show the total of the amounts that went into the Roth this year.) But for 2018, you will only pay taxes on the amount of the conversion(s) that is growth, not the non-deductible contributions.

When you do your 2018 taxes, you will need to attach a note to the IRS to explain what happened. They appreciate people who fix errors as soon as possible and will work with the statement you provide. Put your name and SSN at the top and label it for the 2018 tax year. You can write something like this:

On (date or dates), I made non-deductible contributions to my traditional IRA totaling $5,500. I then decided to roll my entire traditional IRA to my 401K on (date) while putting the $5,500 into my Roth 401K. I was unaware that the non-deductible contributions were ineligible to be rolled over until I started to work on my 2017 tax return.

When I realized this in 2018, I corrected it by asking the 401K custodian (name the 401K custodian that will be listed on the 2018 rollover 1099-R) to send back the entire Roth 401K back to my traditional IRA, which they did. This occurred on (date), when the $5,500 had grown to ($xxxx-put the exact number here after the rollover is complete). Soon after, I converted that traditional IRA to Roth, knowing I only had to pay taxes on the ($xxxx) growth that occurred in the Roth 401K and traditional IRA. I also made another non-deductible contribution of $5,500 to the tIRA on (date) and converted that to Roth on (date).

All my traditional IRAs were empty on December 31, 2018.


Since this statement is longer than the notes section most tax software provides, you may need to send in a paper return with the note attached. Also hold onto a copy in case they don’t notice it while processing the deluge of tax returns during filing season. If they overlook it, they will send you a CP2000 letter questioning what happened. If they are referring to this IRS-401K situation, you can send them a copy of the statement again.

Does anyone else have comments to improve on this or alternative ideas?

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Earl Lemongrab
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Re: Traditional IRA conversion/Roth back door

Post by Earl Lemongrab » Sun May 13, 2018 7:14 pm

It sounds like they have acknowledged the problem, and that's a first step. There should be plan guidance on how to fix the situation.
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noobtoinvesting
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Re: Traditional IRA conversion/Roth back door

Post by noobtoinvesting » Mon May 14, 2018 1:11 pm

Update
So 401k custodian gave me 2 options
Rolled back to original tIRA but they will not issue 1099r as they will be doing "reversal", like these money never existed
Other option is rolled to Roth IRA
In either case I will have to forfeit my gains

noobtoinvesting
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Re: Traditional IRA conversion/Roth back door

Post by noobtoinvesting » Mon May 14, 2018 4:17 pm

celia wrote:
Sun May 13, 2018 6:03 pm
noobtoinvesting wrote:
Sun May 13, 2018 5:15 pm
anyhow, now 401k custodian wants to do "reversal" but my trad IRA (original IRA account) will not correct the 1099 form from 2017, and because of that 401k custodian is looking into doing direct rollover back to original trad IRA. ( not sure the details, @issuing 1099 for 2018)
That's great that the 401K custodian is now willing to correct this. (Lesson learned: Go up the chain of command when the person on the phone doesn't fully understand the situation.) You are not the first person who has made a mistake like this, nor will you be the last.

Ask the 401K custodian to rollover the entire Roth 401K back to your tIRA. That will clean up the error. Then convert the entire traditional IRA to a Roth IRA (so that you are eligible to do future backdoor Roths).

You already have a 1099-R for 2017 that you need to report on your 2017 taxes, as is. There is no tax consequence for this.

Then for 2018, you will get a 1099-R for the rollover back to the tIRA (with an unknown distribution code you would enter into the software) and a 1099-R for the Roth conversion. (After the dust settles, if you then do a backdoor Roth this year, the Roth conversion 1099-R will show the total of the amounts that went into the Roth this year.) But for 2018, you will only pay taxes on the amount of the conversion(s) that is growth, not the non-deductible contributions.

When you do your 2018 taxes, you will need to attach a note to the IRS to explain what happened. They appreciate people who fix errors as soon as possible and will work with the statement you provide. Put your name and SSN at the top and label it for the 2018 tax year. You can write something like this:

On (date or dates), I made non-deductible contributions to my traditional IRA totaling $5,500. I then decided to roll my entire traditional IRA to my 401K on (date) while putting the $5,500 into my Roth 401K. I was unaware that the non-deductible contributions were ineligible to be rolled over until I started to work on my 2017 tax return.

When I realized this in 2018, I corrected it by asking the 401K custodian (name the 401K custodian that will be listed on the 2018 rollover 1099-R) to send back the entire Roth 401K back to my traditional IRA, which they did. This occurred on (date), when the $5,500 had grown to ($xxxx-put the exact number here after the rollover is complete). Soon after, I converted that traditional IRA to Roth, knowing I only had to pay taxes on the ($xxxx) growth that occurred in the Roth 401K and traditional IRA. I also made another non-deductible contribution of $5,500 to the tIRA on (date) and converted that to Roth on (date).

All my traditional IRAs were empty on December 31, 2018.


Since this statement is longer than the notes section most tax software provides, you may need to send in a paper return with the note attached. Also hold onto a copy in case they don’t notice it while processing the deluge of tax returns during filing season. If they overlook it, they will send you a CP2000 letter questioning what happened. If they are referring to this IRS-401K situation, you can send them a copy of the statement again.

Does anyone else have comments to improve on this or alternative ideas?
Update
So 401k custodian gave me 2 options
Rolled back to original tIRA but they will not issue 1099r as they will be doing "reversal", like these money never existed
Other option is rolled to Roth IRA
In either case I will have to forfeit my gains

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Earl Lemongrab
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Re: Traditional IRA conversion/Roth back door

Post by Earl Lemongrab » Mon May 14, 2018 6:39 pm

If you do option 1, will they allow you to redo the rollover correctly?
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celia
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Re: Traditional IRA conversion/Roth back door

Post by celia » Mon May 14, 2018 8:36 pm

Would the $200 stay in the Roth 401K or would the custodian keep it? I would not want to give up $200. If they keep it for themselves, that even sounds shady to me (like they are complicit in the mistake). In reality, they should never have accepted the money, but as soon as they found out, they should have sent it back to your tIRA.

Assuming they would be keeping it for themselves, I would tell them to fix it correctly by sending the non-deductible contribution and growth back to the tIRA and report it to the IRS correctly. They appear to be using the "fear of the IRS" to scam some money from you.

The IRS is reasonable when it comes to errors like this. If you fix it properly and explain what happened, all be be well. What if the custodian does it their way and makes another mistake on top of this mess? How will you explain THAT to the IRS?

Note that the IRS knows about all contributions and withdrawals from all IRAs and likely all 401Ks. For rollovers, I believe they will match a withdrawal somewhere with the same amount of money going into another account. If they see a withdrawal that doesn't get deposited and it isn't reported on your return, they will contact you.

I would call up and talk to someone higher than the supervisor. Also ask where their plan documents discuss this procedure. Get a copy if you don't have it.

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celia
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Re: Traditional IRA conversion/Roth back door

Post by celia » Mon May 14, 2018 8:39 pm

Earl Lemongrab wrote:
Mon May 14, 2018 6:39 pm
If you do option 1, will they allow you to redo the rollover correctly?
:?: :?: :?:

We are talking about a non-deductible contribution to an IRA that was not eligible to be rolled over to a 401K, right?

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Earl Lemongrab
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Re: Traditional IRA conversion/Roth back door

Post by Earl Lemongrab » Mon May 14, 2018 11:28 pm

celia wrote:
Mon May 14, 2018 8:39 pm
Earl Lemongrab wrote:
Mon May 14, 2018 6:39 pm
If you do option 1, will they allow you to redo the rollover correctly?
:?: :?: :?:

We are talking about a non-deductible contribution to an IRA that was not eligible to be rolled over to a 401K, right?
The original rollover was a mix. I got they impression that they were going to void and return the entire rollover. So there would still be some pretax and non-deductible in the TIRA.
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Re: Traditional IRA conversion/Roth back door

Post by noobtoinvesting » Tue May 15, 2018 12:28 pm

celia wrote:
Mon May 14, 2018 8:36 pm
Would the $200 stay in the Roth 401K or would the custodian keep it? I would not want to give up $200. If they keep it for themselves, that even sounds shady to me (like they are complicit in the mistake). In reality, they should never have accepted the money, but as soon as they found out, they should have sent it back to your tIRA.

Assuming they would be keeping it for themselves, I would tell them to fix it correctly by sending the non-deductible contribution and growth back to the tIRA and report it to the IRS correctly. They appear to be using the "fear of the IRS" to scam some money from you.

The IRS is reasonable when it comes to errors like this. If you fix it properly and explain what happened, all be be well. What if the custodian does it their way and makes another mistake on top of this mess? How will you explain THAT to the IRS?

Note that the IRS knows about all contributions and withdrawals from all IRAs and likely all 401Ks. For rollovers, I believe they will match a withdrawal somewhere with the same amount of money going into another account. If they see a withdrawal that doesn't get deposited and it isn't reported on your return, they will contact you.

I would call up and talk to someone higher than the supervisor. Also ask where their plan documents discuss this procedure. Get a copy if you don't have it.
update
I called to my original tIRA account and explain them the situation AGAIN, they will update the 1099 form once they receive that 5500 fund back as a "reversal". original tIRA account holder wanted to make sure that 401k custodian will not report/generate any tax documents on their end. now my 401k custodian will send check to tIRA and once they deposit the funds, update 1099 form i will convert it to roth.

as per 401k custodian the gain will go to "forfeiture account"

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Earl Lemongrab
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Re: Traditional IRA conversion/Roth back door

Post by Earl Lemongrab » Tue May 15, 2018 12:37 pm

How much pretax was in the original rollover? If it's significant, I wouldn't be eager to pay tax on conversion. I realize that you made a mistake originally and caused a problem, but why not do it correctly now?
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Re: Traditional IRA conversion/Roth back door

Post by noobtoinvesting » Tue May 15, 2018 2:51 pm

Earl Lemongrab wrote:
Tue May 15, 2018 12:37 pm
How much pretax was in the original rollover? If it's significant, I wouldn't be eager to pay tax on conversion. I realize that you made a mistake originally and caused a problem, but why not do it correctly now?

83k (pre-tax) + $5500(post tax)
they are rolling back/reversing only $5500, they will update 1099 form to reflect that 83k was rolled over instead of $88500

I am gonna convert only 5500 to roth, 83k stays at regular 401k and i dont think i pay any tax on conversion. please correct me if i am wrong

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celia
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Re: Traditional IRA conversion/Roth back door

Post by celia » Tue May 15, 2018 4:29 pm

noobtoinvesting wrote:
Tue May 15, 2018 2:51 pm
I am gonna convert only 5500 to roth, 83k stays at regular 401k and i dont think i pay any tax on conversion. please correct me if i am wrong
There won't be any tax on the 2017 rollover or the 2018 conversion. You won't have to add any statement to your taxes. The only down-side is the loss of the $200 gain. I guess you just had a $200 lesson on rollovers! :oops:

Hope it all works out like you expect. Let us know if this was successful! It's a lesson for me, too.

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Re: Traditional IRA conversion/Roth back door

Post by Alan S. » Tue May 15, 2018 6:00 pm

There shouldn't be any rollback.

The original IRA distribution of after tax money was not eligible for rollover to a qualified plan, so it must be reported as a distribution. It would not be taxable if it did not exceed the basis in the TIRA, but must be reported on line 15 of Form 1040.

It was rolled into the 401k, inexplicably to the Roth account. This was an "invalid rollover contribution". The IRS Regs are summarized in RR 2014-9:
Under § 1.401(a)(31)–1, Q&A–14(b)(1), an invalid rollover contribution is an amount accepted by a plan as a rollover that is not an eligible rollover distribution from a qualified plan or an amount that does not satisfy the requirements of § 401(a)(31), 402(c), or 408(d)(3) for treatment as a rollover or rollover contribution. Under § 1.401(a)(31)–1, Q&A–14(b)(2), a valid rollover contribution is a contribution that is accepted by a plan as a rollover within the meaning of § 1.402(c)–2, Q&A–1, or as a rollover contribution within the meaning of § 408(d)(3), and that satisfies the requirements of § 401(a)(31), 402(c), or 408(d)(3) for treatment as a rollover or a rollover contribution.
While EPCRS does not provide summary correction procedures for invalid rollover contributions, it is logical that once the plan understands the nature of this error, they would have to distribute the invalid rollover contribution along with any earnings to the participant. Only the earnings should be taxable on the resulting 1099R.

Since this was an invalid rollover contribution to the plan, it CANNOT be rolled back into an IRA, because corrective distributions of all types from a qualified plan are not rollover eligible, so this option offered by the plan just compounds their error. OP therefore will owe tax on the earnings plus penalty on the earnings and will have used up their IRA basis by taking the IRA distribution. So there will not be any back door Roth done using the basis recovered by distributing the after tax TIRA balance.


The use of Rev Procedure 2016-47 in this situation is an interesting question. This RP provides a self certification notice to be filed with certain exemptions allowing the 60 day rollover deadline to be overlooked (extended). The usual situation is that the IRA owner puts the money in a taxable account, thinking it was an IRA or other retirement plan. However, in this situation a disallowed rollover was attempted and completed (Either to pre tax 401k or Roth, neither is allowed) through errors of both the OP and the 401k administrator. When this money comes out of the 401k as an invalid rollover, it is no longer rollover eligible. The Rev Procedure is for completing a 60 day rollover when the amount remains eligible for rollover, but the invalid rollover to the 401k overrode the distribution remaining eligible for rollover.

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Earl Lemongrab
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Re: Traditional IRA conversion/Roth back door

Post by Earl Lemongrab » Tue May 15, 2018 6:12 pm

This whole thing sounded familiar to me, so I looked back. You posted about this last November.

viewtopic.php?f=2&t=232397

Not sure why I was so grumpy then. Still deciding on whether to retire or not I guess.

Anyway, it would have been a good idea to deal with it then.
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Re: Traditional IRA conversion/Roth back door

Post by noobtoinvesting » Tue May 15, 2018 7:59 pm

Alan S. wrote:
Tue May 15, 2018 6:00 pm
There shouldn't be any rollback.

The original IRA distribution of after tax money was not eligible for rollover to a qualified plan, so it must be reported as a distribution. It would not be taxable if it did not exceed the basis in the TIRA, but must be reported on line 15 of Form 1040.

It was rolled into the 401k, inexplicably to the Roth account. This was an "invalid rollover contribution". The IRS Regs are summarized in RR 2014-9:
Under § 1.401(a)(31)–1, Q&A–14(b)(1), an invalid rollover contribution is an amount accepted by a plan as a rollover that is not an eligible rollover distribution from a qualified plan or an amount that does not satisfy the requirements of § 401(a)(31), 402(c), or 408(d)(3) for treatment as a rollover or rollover contribution. Under § 1.401(a)(31)–1, Q&A–14(b)(2), a valid rollover contribution is a contribution that is accepted by a plan as a rollover within the meaning of § 1.402(c)–2, Q&A–1, or as a rollover contribution within the meaning of § 408(d)(3), and that satisfies the requirements of § 401(a)(31), 402(c), or 408(d)(3) for treatment as a rollover or a rollover contribution.
While EPCRS does not provide summary correction procedures for invalid rollover contributions, it is logical that once the plan understands the nature of this error, they would have to distribute the invalid rollover contribution along with any earnings to the participant. Only the earnings should be taxable on the resulting 1099R.

Since this was an invalid rollover contribution to the plan, it CANNOT be rolled back into an IRA, because corrective distributions of all types from a qualified plan are not rollover eligible, so this option offered by the plan just compounds their error. OP therefore will owe tax on the earnings plus penalty on the earnings and will have used up their IRA basis by taking the IRA distribution. So there will not be any back door Roth done using the basis recovered by distributing the after tax TIRA balance.


The use of Rev Procedure 2016-47 in this situation is an interesting question. This RP provides a self certification notice to be filed with certain exemptions allowing the 60 day rollover deadline to be overlooked (extended). The usual situation is that the IRA owner puts the money in a taxable account, thinking it was an IRA or other retirement plan. However, in this situation a disallowed rollover was attempted and completed (Either to pre tax 401k or Roth, neither is allowed) through errors of both the OP and the 401k administrator. When this money comes out of the 401k as an invalid rollover, it is no longer rollover eligible. The Rev Procedure is for completing a 60 day rollover when the amount remains eligible for rollover, but the invalid rollover to the 401k overrode the distribution remaining eligible for rollover.
As far I understand @ 401k custodian doing reversal of $5500, its gonna be like it never happened, only 83k was rolled over and $5500 never left.
new 1099 from will be issued with 83k rolled money to regular 401k, 401k custodian is not going to issue any tax form (1099), original tIRA account will only issue/fix 1099 for 2017, no 5498 for 2017 or 2018. let me if I am missing something or i did not understand correctly here

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celia
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Re: Traditional IRA conversion/Roth back door

Post by celia » Wed May 16, 2018 4:10 am

Alan S. wrote:
Tue May 15, 2018 6:00 pm
There shouldn't be any rollback. . .

While EPCRS does not provide summary correction procedures for invalid rollover contributions, it is logical that once the plan understands the nature of this error, they would have to distribute the invalid rollover contribution along with any earnings to the participant. Only the earnings should be taxable on the resulting 1099R.
I also could not find any corrective steps online, although I am probably not as proficient as you are in researching this. It seems to me that the 401K custodian's proposed solution is just as valid as your suggestion withdrawing the contribution and its gains to go to the participant. If the money goes to the participant, there could also be taxes on the contribution if the participant is not yet 59.5 or the money was in a retirement account for < 5 years. (If there was to be no such "penalty" paid to the IRS, people would intentionally use this method to pull money out of their 401K/IRA early.)

Since this was an invalid rollover contribution to the plan, it CANNOT be rolled back into an IRA, because corrective distributions of all types from a qualified plan are not rollover eligible, so this option offered by the plan just compounds their error. OP therefore will owe tax on the earnings plus penalty on the earnings and will have used up their IRA basis by taking the IRA distribution. So there will not be any back door Roth done using the basis recovered by distributing the after tax TIRA balance.
The 401K custodian seems to be calling this a "reversal" instead of a "rollover". They are now willing to fix the error and both the 401K custodian and tIRA custodian will issue new forms as if the non-deductible money had never been moved. Since the 401K custodian has been difficult to work with all along, I would use the pragmatic "solution" of following both custodians' suggestions. It would probably make things worse in the 401K custodian's eyes to distribute the money to the participant. How would they even code a 1099-R for such a transaction (since that part of the rollover should not have happened)?

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