Reverse Rollover Mistake

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0x534947
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Reverse Rollover Mistake

Post by 0x534947 » Sun May 19, 2019 1:20 am

I did a reverse rollover earlier this month from a traditional IRA to an employee sponsored 401K plan in order to get ready for a backdoor Roth conversion in the future. The rollover was from an account that was opened in 2014 and which I have not contributed to since 2015. Below is a snapshot of the account before the conversion:

2014 contribution: $5500
2015 contribution: $5500
Earnings/Gains: ~$1500
Total: $12500

From online readings, I am aware that when you do a reverse rollover from a traditional IRA to a 401K that you are supposed to only rollover pre tax funds. I mistakenly assumed (I should have checked my previous years tax returns before doing this) :oops: that I had deducted the above contributions in my taxes but that's not the case. It looks like in 2014 I was only able to deduct ~$4000 due to my AGI and for 2015 I made more than the requirements to take a deduction. Essentially the breakdown is the following:

Pretax: 4000 + 1500 (earnings/gains)
Postax: 7000

I am pretty sure I screwed this up as I indicated in the rollover form that the source was pretax funds when a portion of it is not. Can I still fix this? Thanks for the help.

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celia
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Re: Reverse Rollover Mistake

Post by celia » Sun May 19, 2019 1:37 am

OP, yes, you must fix it. But, please clarify a few things. What do you mean by a "reverse rollover"? To me that means you rolled over a 401K to a tIRA, then reversed it. Or maybe you started in the tIRA, going to a 401K, then reversed it.

What kind of "account" did the money start in? And how many transactions were there? Using the wrong terminology can lead to errors.

Did you file Form 8606 for 2014 and 2015?

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0x534947
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Re: Reverse Rollover Mistake

Post by 0x534947 » Sun May 19, 2019 1:59 am

Hi Celia,

Thanks for the reply, by reverse rollover I mean a traditional IRA to 401K rollover. There is no reversal that has occurred yet, it was just a rollover in one direction (Traditonal IRA --> Employee Sponsored 401K).

--> What kind of "account" did the money start in? And how many transactions were there?
It was a traditional IRA account that was opened in 2014 and consisted of funds that I contributed based on the limits (5500) for those years (2014 and 2015 respectively). I am not sure as to how many transactions there were (I would have to check) but I am going to guess that it was probably 3-4 in each year until I reached the $5500 limit.

-->Did you file Form 8606 for 2014 and 2015?

Yes, that's how I figured out what I had and had not deducted in 2014/2015 respectively. Thanks!

retiredjg
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Re: Reverse Rollover Mistake

Post by retiredjg » Sun May 19, 2019 5:49 am

Call your 401k provider and tell them you have discovered a mistake - that you rolled some basis (already taxed money) into their 401k. They are required to fix this.

I seem to remember something about the money coming back to you instead of going back to your tIRA...but not sure.

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celia
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Re: Reverse Rollover Mistake

Post by celia » Sun May 19, 2019 6:20 am

Now, I get it!
+1 on telling the 401k custodian and asking how it should be cleaned up. You’ll have to know the exact amount of your basis (contributed dollars that were already taxed). The 401K custodian will be anxious to get those dollars removed because they are not permitted to accept post-tax dollars. The should send them back to the IRA where you will then do a Roth conversion on them.

An alternate would be to return the current value of the money you rolled over back to the IRA (a reverse Rollover!) and you could convert all of it, paying taxes on only the tax-deferred dollars. It might depend on what tax bracket you will be in this year and if you have some cash for the Roth conversion taxes.

Your choice.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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0x534947
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Re: Reverse Rollover Mistake

Post by 0x534947 » Sun May 19, 2019 11:07 am

OK, I will call them up tomorrow to let them know. A couple of questions, If the tIRA account that was originally use was closed and no longer opened would I be able to take a check for the non-deductible (after money)? If I do decide to put this into another tIRA will this count towards the 6K limit in 2019? (I am guessing this is no but wanted to confirm). Thanks for all the help.

retiredjg
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Re: Reverse Rollover Mistake

Post by retiredjg » Sun May 19, 2019 2:30 pm

If you have to take a check and if you are allowed to do a 60 day rollover back to IRA, it would be a rollover and that would not count as part of your 2019 IRA contribution.

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celia
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Re: Reverse Rollover Mistake

Post by celia » Tue May 21, 2019 6:43 am

You could open up another traditional IRA and have the check sent to it. You were going to need one anyway for backdoor Roths, right? Or you could ask if the old traditional IRA could be re-opened.

If you do take a check, have it made out to the tIRA custodian For Benefit Of "0x534947". If they send it to you, you should immediately turn around and send it back to the custodian.

If you get a check made out to "0x534947", this will be considered an early withdrawal by you. Not only will you have to pay taxes on the tax-deferred amount, but also a 10% penalty if you are under 59.5. If you are willing to do that, why not just put it in the tIRA, convert it to Roth, and pay the same taxes (and no penalty)?

This would not be a contribution. You would still be able to make a $6,000 ($7,000, if over 50) non-deductible contribution to start your backdoor Roth. Then convert it soon after (before the amount grows).
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.

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0x534947
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Re: Reverse Rollover Mistake

Post by 0x534947 » Wed Sep 04, 2019 10:25 am

To follow up on this post, I finally got all this sorted out and ended up receiving two checks from the 401K plan administrator. The first check was for the post tax funds $7000.00 rolled over by mistake into the 401K and the other check was for earnings (they withheld federal incomes taxes on this, ~$300 after taxes) on the amount ineligible to be rolled in.

A couple of things, I opened up a traditional IRA to put the 7K into but they require an account number on the check to deposit it. The 401K plan administrator has told me that they can't modified the check or add any information to it. They mentioned that if I am putting this into a traditional IRA that I can't do a direct rollover and therefore need to do an indirect rollover.

It looks like I have 60 days to perform the indirect rollover but I am unsure about how to go about doing this. Do I take the bigger (7K) post tax fund check and deposit to my savings/checking account to transfer this money to the traditional IRA right after? When funding the traditional IRA account I have the option for "non deductible" contributions which is what I would choose but I have already exceeded the 6K limit for 2019 and no matter what amount I enter, I won't be able to proceed due to "The amount entered exceeds the IRA limit". Is there a form that I need to get from the tradional IRA account administrator to let them allow me to do an indirect rollover? Also, regarding the smaller amount ($300) I am assuming that this can go directly into my checking/saving for discretionary spending? Thanks for the help.

retiredjg
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Re: Reverse Rollover Mistake

Post by retiredjg » Wed Sep 04, 2019 10:53 am

This is post-tax money. I wonder if you should be putting it into a Roth IRA instead of tIRA (if you can put it into anything at all - I seem to recall something about that).

Do you have the Forms 8606 from your earlier taxes that documented these non-deductible contributions?

But yes, assuming it can go into IRA/Roth IRA, you would have to use the paperwork that accompanies a rollover. As you've already found out, it must be distinguished from an ordinary contribution. However, this is not really a rollover, so I'm unsure what you should do.

Spirit Rider
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Re: Reverse Rollover Mistake

Post by Spirit Rider » Wed Sep 04, 2019 11:59 am

If these checks are made out to you, they are a distribution. You would most definitely have to do a 60-day indirect rollover. Unfortunately, the corrective action is to reverse the mistaken IRA - 401k non-deductible rollover. That means it must be rolled back over to a traditional IRA and can not be rolled over to a Roth IRA
0x534947 wrote:
Wed Sep 04, 2019 10:25 am
To follow up on this post, I finally got all this sorted out and ended up receiving two checks from the 401K plan administrator. The first check was for the post tax funds $7000.00 rolled over by mistake into the 401K and the other check was for earnings (they withheld federal incomes taxes on this, ~$300 after taxes) on the amount ineligible to be rolled in.
The 401k plan has this exactly backwards. Only pre-tax distributions that are eligible for rollover are subject to the mandatory 20% withholding. If the earnings were not eligible for rollover, there would be no withholding.

If your 401k plan accepts IRA rollovers. You can and should rollover the non deductible distribution, the pre-tax distribution and the 20% withholding amount. If you do this, you will enter the total amount in your Form 1040 Line 4a and $0 in Line 4b. None of this will be taxable. Then rollover any pre-tax balances in all traditional, SEP and SIMPLE IRA accounts to the 401k. The correct amount will the total balances - any non-deductible basis.

This will leave just non-deductible basis in the traditional IRA. Then do a Roth conversion of the total traditional IRA balance consisting of the non-deductible basis + any minimal earnings from the date of the rollover to the Roth conversion. There will be little to no tax liability.

Topic Author
0x534947
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Re: Reverse Rollover Mistake

Post by 0x534947 » Wed Sep 04, 2019 10:36 pm

retiredjg wrote:
Wed Sep 04, 2019 10:53 am
Do you have the Forms 8606 from your earlier taxes that documented these non-deductible contributions?

But yes, assuming it can go into IRA/Roth IRA, you would have to use the paperwork that accompanies a rollover. As you've already found out, it must be distinguished from an ordinary contribution. However, this is not really a rollover, so I'm unsure what you should do.
Yes, I have all the 8606 forms from my earlier taxes that document all of this. I will talk to the folks where the traditional IRA resides to see what paperwork is required for an indirect rollover.
Spirit Rider wrote:
Wed Sep 04, 2019 11:59 am
That means it must be rolled back over to a traditional IRA and can not be rolled over to a Roth IRA
This sounds correct and it is what I was planning on doing (rolling over to a traditional IRA which is where the funds were originally located).
Spirit Rider wrote:
Wed Sep 04, 2019 11:59 am
If your 401k plan accepts IRA rollovers. You can and should rollover the non deductible distribution, the pre-tax distribution and the 20% withholding amount.
The 401K does not accept non-deductible (post tax) funds which is what got me into this mess the first time as I rolled some of these funds into the plan by mistake (it is an "ineligible rollover contributions"). Right I now I have a check for 7K (this is non deductible post tax money) that I need to indirectly rollover into a traditional IRA. I wasn't quite sure what this process entails but it looks like there might be forms that I can get from my T-IRA holder to help make this happen? Thanks for the help.

Spirit Rider
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Re: Reverse Rollover Mistake

Post by Spirit Rider » Wed Sep 04, 2019 10:56 pm

0x534947 wrote:
Wed Sep 04, 2019 10:36 pm
The 401K does not accept non-deductible (post tax) funds which is what got me into this mess the first time as I rolled some of these funds into the plan by mistake (it is an "ineligible rollover contributions"). Right I now I have a check for 7K (this is non deductible post tax money) that I need to indirectly rollover into a traditional IRA. I wasn't quite sure what this process entails but it looks like there might be forms that I can get from my T-IRA holder to help make this happen? Thanks for the help.
Did you not read my prior post. I explicitly stated; to rollover the non-deductible amounts, the pre-tax distribution with the 20% withholding and the 20% withholding amount to a traditional IRA. I also gave you explicit instructions on how to calculate the pre-tax balances and ONLY rollover that amount back into the 401k. This is the standard instruction on how to rollover only pre-tax balances and not have any ineligible rollover amounts.

Topic Author
0x534947
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Re: Reverse Rollover Mistake

Post by 0x534947 » Wed Sep 04, 2019 11:11 pm

I reached out to the folks that hold my T-IRA regarding the indirect rollover and apparently I can just snail mail the check to them. There are no forms or any requirements. I should be all set here, thanks again.

Spirit Rider
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Re: Reverse Rollover Mistake

Post by Spirit Rider » Wed Sep 04, 2019 11:44 pm

0x534947 wrote:
Wed Sep 04, 2019 11:11 pm
I reached out to the folks that hold my T-IRA regarding the indirect rollover and apparently I can just snail mail the check to them. There are no forms or any requirements. I should be all set here, thanks again.
This does not sound right. They have to know it is a rollover or they will consider it a standard contribution subject to the contribution limits.

retiredjg
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Re: Reverse Rollover Mistake

Post by retiredjg » Thu Sep 05, 2019 6:55 am

0x534947 wrote:
Wed Sep 04, 2019 11:11 pm
I reached out to the folks that hold my T-IRA regarding the indirect rollover and apparently I can just snail mail the check to them. There are no forms or any requirements. I should be all set here, thanks again.
I agree this does not sound right. Maybe they think the check is made out to your account there rather than to you.

Try again and/or look on their website for the proper form. Make sure they know the check will be coming from your personal bank account and that this is a 60 day rollover.

retiredjg
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Re: Reverse Rollover Mistake

Post by retiredjg » Thu Sep 05, 2019 7:04 am

Spirit Rider, I'd like to know if I understand you correctly.

You think this poster should send a check for ~$7,375 (the $7k + the entire earnings) to his/her traditional IRA and then convert the whole thing to Roth. The basis on the old 8606 will offset the $7k and the earnings of ~$375 will be taxed.

Is that correct?

(This assumes that 0x534947 does not wish to send that $375 back to the 401k).

Alan S.
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Re: Reverse Rollover Mistake

Post by Alan S. » Thu Sep 05, 2019 10:23 am

The IRS has never explained the complete process for handling this situation, or perhaps they cannot make it simple enough to release guidance.

After searching EPCRS guidance several times for specific guidance on this and finding none, I'll just project what the guidance would have been applying consistency with other documented IRS guidance in analogous situations. Since the 401k plan is being told they accepted an amount not eligible for rollover by their participant, the plan must distribute that amount with allocated earnings per Notice 2014-9. The 1099R for this will likely be coded E (EPCRS distribution which means that the distribution is not eligible for rollover. Taxes on the gains in Box 2a would be due, but no early withdrawal penalty.

However, that might not be the total story either. When a 401k discovers that amounts they distributed in a direct rollover were not eligible (eg. if excess contributions were included), they must re issue their 1099R as two forms per the 1099R Inst, one reporting the amount actually eligible for direct rollover with a G code and the other as a distribution (Codes 8, P, or E) not eligible for rollover and the participant must report this on their 1040. There is NO SUCH guidance for IRA custodians, but it seems like the solution should be the same. That means that the IRA custodian that originally issued a G coded 1099 to report a direct rollover to the 401k plan should correct that 1099R just like a qualified plan would. That would result in corrected 1099R forms from the IRA custodian showing the amount eligible (no basis) as Code G, and the ineligible basis as Code 1 (or 7). With such a 1099R the IRA owner should be able to roll back the after tax amount if they can do so within 60 days of the IRA distribution (not the 401k distribution). Of course, this will require a detailed explanatory statement with the tax return that will likely only be understood by a special few people at the IRS.

Given the above, one of the reasons that neither EPCRS or the 1099 R Inst address this situation could be that it is too involved for the IRS to want to make it official guidance. Another issue is that the IRA custodian has no knowledge of the amount of IRA basis in either their own IRA or any other IRA owned by this person. When a direct rollover is made to an employer plan from an IRA, pre tax dollars from all non Roth IRAs are deemed to transfer first without consideration of the composition of just the IRA account reporting the distribution.

Due to this lack of guidance, it is impossible to predict exactly how the IRA custodian, the 401k administrator, and the IRS itself will report these transactions. As a result it is also impossible to provide specific guidance to those who ask how to fix this problem since we simply do not know how corrective activity will be reported. I think the IRS was remiss not complete the loop created by Notice 2014-9 which simply states that the 401k should distribute the basis with earnings. That leaves everyone hanging, since a distribution can be reported in many different ways.

Spirit Rider
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Re: Reverse Rollover Mistake

Post by Spirit Rider » Thu Sep 05, 2019 11:48 am

Alan, my takeaway from the distributions is that they did a 20% mandatory withholding on the pre-tax earnings. That only applies to distributions that are eligible for rollover. This would imply that the earnings are eligible for rollover, or the 401k plan screwed up.

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0x534947
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Re: Reverse Rollover Mistake

Post by 0x534947 » Mon Sep 09, 2019 12:03 am

Apologies for the late reply, had some emergencies come up and didn't get a chance to follow up here.
Only pre-tax distributions that are eligible for rollover are subject to the mandatory 20% withholding. If the earnings were not eligible for rollover, there would be no withholding.
They did not withhold 20%, I received the original non-deductible post tax funds ($7K) that was put into the 401K by mistake and a separate check that was earnings on the amount ineligible to be rolled in. The excess amount (earnings) was about ~$330.00 total and they withheld ~$30.00 for federal income taxes. I might have not made this clear originally but there was no 20% withholding (it was more like ~10% in federal taxes that was withheld).

I am actually not sure where the 20% came up originally in this thread as that's not something that they have withheld. Apologies if something was unclear from my end.
This does not sound right. They have to know it is a rollover or they will consider it a standard contribution subject to the contribution limits.
I agree this does not sound right. Maybe they think the check is made out to your account there rather than to you.

Try again and/or look on their website for the proper form. Make sure they know the check will be coming from your personal bank account and that this is a 60 day rollover.
I explained this to them and they are aware where the money is coming from (401K) and that it is non-deductible post tax money that was ineligible to be rolled in to the 401K that I am getting back. I haven't mailed the check to them yet but will call them again and make sure that this amount will not be subject to my contribution limits for 2019. I have already contributed the maximum for 2019 and the custodian of my T-IRA is aware as they hold the account where this contribution was made.

They know that the check is made out to me as they had originally requested that I get the check modified to have the T-IRA account # added in addition to my name. I told them that this is not possible as the 401K custodian mentioned that they will not do that and that an indirect rollover must be performed. My T-IRA holder then mentioned that it should be fine to proceed without an account number as long as I sign the back of the check and put the T-IRA account number in the back.

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0x534947
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Re: Reverse Rollover Mistake

Post by 0x534947 » Mon Sep 09, 2019 12:19 am

(This assumes that 0x534947 does not wish to send that $375 back to the 401k).
I don't think that's possible, so that we are on the right page the excess amount (earnings) was about ~$330.00 total and they withheld ~$30.00 for federal income taxes. The 401K holder that gave me the check (~$300) mentioned a few things about this (see #3):

1. They will report the taxable portion of the corrective distribution on a 2019 IRS form 1099-R
2. The taxable portion of the corrective distribution should be included in my gross income for tax year 2019
3. The amount of this refund is not eligible to be rollover into another qualified plan or IRA.

I don't think I can do anything with the second check besides using it for discretionary spending.

Spirit Rider
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Re: Reverse Rollover Mistake

Post by Spirit Rider » Mon Sep 09, 2019 9:59 am

My mistake assuming that if there was withholding, it was 20% mandatory withholding. However, distributions not eligible for rollover usually have no withholding applied. The 10% default withholding only applies to IRA not 401k account distributions. You should have had to authorize the 10% withholding.

Topic Author
0x534947
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Re: Reverse Rollover Mistake

Post by 0x534947 » Tue Sep 10, 2019 12:49 am

The 10% default withholding only applies to IRA not 401k account distributions. You should have had to authorize the 10% withholding.
hmm, interesting. I don't remember authorizing this and it was done automatically by my 401K custodian. At this point, I am just going to leave it as is since the amount is relatively small and the effort to get it fixed is not worth it in my opinion.
I haven't mailed the check to them yet but will call them again and make sure that this amount will not be subject to my contribution limits for 2019.
This does appear to be the case as I just reached out to them to verify and I should be good to proceed with the indirect rollover. Thanks for all the help.

Spirit Rider
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Re: Reverse Rollover Mistake

Post by Spirit Rider » Tue Sep 10, 2019 10:09 am

0x534947 wrote:
Tue Sep 10, 2019 12:49 am
The 10% default withholding only applies to IRA not 401k account distributions. You should have had to authorize the 10% withholding.
hmm, interesting. I don't remember authorizing this and it was done automatically by my 401K custodian. At this point, I am just going to leave it as is since the amount is relatively small and the effort to get it fixed is not worth it in my opinion.
The withholding is only a problem with a large eligible rollover amount. In that case you have to make up the withholding when do the rollover or the withheld amount is taxable. In this case the 10% will likely partially offset the tax liability of the ineligible rollover amount.

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