Backdoor Roth IRA Mistake - HELP!

[CountingDown2014]

In order to do a backdoor Roth IRA conversion, I mistakenly used my IRA basis from my 2012 return as a guide and forgot about my $6,500 2013 non-deductible IRA contribution I had made at the beginning of last year. As a result, I have rolled $6500 too much into my 401k . Does anyone have any suggestions as to how I can fix this and somehow get the "already taxed" $6500 out of my 401k and into the Roth IRA? Thanks very much.

 

[CountingDown2014]

BTW, since this transfer to my 401k occurred in January 2014, I was thinking maybe I could see if my 401k would allow me to roll the $6500 into a traditional IRA and then convert that to a Roth IRA all in the same year and include my $6500 basis in the amount converted to a Roth IRA on IRS Form 8606. Any thoughts on this approach?

 

[pb4uski]

Call the 401k administrator, find someone who is knowledgeable, explain the situation and see what alternatives are available to you. I have had over contributions in the past that I was able to have reversed as an excess contribution.

 

[Animorph]

If everything tracked properly, you should have $6500 in after-tax money in the 401k. I think that could be rolled directly into a Roth, if your company allows that.

 

[gauss]

Does your company allow AND TRACK after-tax rollovers into your traditional 401k? Many do not. You might want to post this over at fairmark.com also.

-gauss

 

[sheehs1]

If everything tracked properly, you should have $6500 in after-tax money in the 401k. I think that could be rolled directly into a Roth, if your company allows that.

And watch for a 1099 distribution for $6,5000 next year. If you get one, ask them for a corrected 1099.

I had this happen. Well...actually what happened is the brokerage back office incorrectly coded an every 6 mth distribution to me when I wasn't taking distributions!! Routed it to my cash account. I didn't catch it on the monthly statements. Didn't catch it until I received a 1099 three months or so later. Brokerage sent a corrected 1099.

I still received a notice from the IRS that I owed them money for the "distribution" even with the corrected 1099 that was sent (lag time I suppose). A letter with back up documentation was necessary to clear it up.

So keep all your documentation just in case, even the contact for the 401K administration.

 

[CountingDown2014]

Thanks everyone for your suggestions. I haven't heard back from the 401k administrator, but looking at our 401k website, it isn't clear that I can somehow just withdraw the after-tax portion of the rollover. gauss - it doesn't look like my 401k plan tracks after-tax rollovers, so this is a concern.

Hopefully I will be able get this resolved (famous last words). Thanks again.

 

[CountingDown2014]

Heard from our 401k provider and was told I could do a $6500 rollover to an IRA so I guess I will get that in process. I was told that the money was not coded as "after tax" when it came in (in response to my question as to whether I should specify in the withdrawal form that the withdrawal was only to come from my after-tax account), so I am hoping that this doesn't create any issues down the line. Fingers crossed!

 

[gauss]

Have you run this scenario through a future form 8606 (lines 1-14) yet?

At first I thought that you would have problems when you tried to do this, but I mocked up a simple example that was designed to capture the essence of your situation. The result was that the non-taxable basis in the IRA is preserved even though funds were rolled over into the Traditional 401k.

When, in the future, you rollover from trad 401k to trad IRA, the 401k people will report that 100% of the distribution is taxable (assuming that they do not change how they are accounting for your deposit). Then you would have the money (and the non-taxable basis) back in the IRA.

I don't 100% trust this argument yet, however, for the following reason. Let's say that the 401k properly coded your in-bound rollover as after-tax money. Then when the money is distributed back, it would be reported as after tax. You could just keep the money and not pay tax on it & still have the after-tax basis still in the IRA. You have effectively doubled the amount of your tax-free dollars -- basically a tax arbitrage!

Obviously there is a fallacy in here somewhere. I believe that I am probably missing something. Perhaps 401k plans are prohibited from accepting after-tax rollovers from IRAs. Would need to research that further. If traditional 401ks are indeed prohibited from accepting after-tax IRA rollovers, then my logic may hold up and you might not have a problem.

-gauss

 

[gauss]

Obviously there is a fallacy in here somewhere. I believe that I am probably missing something. Perhaps 401k plans are prohibited from accepting after-tax rollovers from IRAs. Would need to research that further. If traditional 401ks are indeed prohibited from accepting after-tax IRA rollovers, then my logic may hold up and you might not have a problem.

-gauss

Okay, I found a reference from 2003. 2002 Tax Changes: IRAs / Retirement Plans

In the final paragraph:
"Rollovers from IRAs to employer plans may not include any after-tax contributions."

I don't think this has changed since 2003.

-gauss

 

[CountingDown2014]

gauss - Thanks for your feedback.

I did think about how I would report this on Form 8606 but since the transfer from tIRA to 401k and back was in the same tax year, there would be no change in my IRA basis so I hoping I wouldn't have to address these two transfers.

BTW, with respect to your response quote below, I didn't think the rollover from 401k to tIRA would be considered a taxable distribution since the money wasn't going to me directly but rather back to a tIRA.

"When, in the future, you rollover from trad 401k to trad IRA, the 401k people will report that 100% of the distribution is taxable (assuming that they do not change how they are accounting for your deposit). Then you would have the money (and the non-taxable basis) back in the IRA.

I agree that after-tax contributions shouldn't have gone into my 401k so hopefully if this is ever challenged, my records will reflect that I acted as quickly as I could to try to correct my error.

 

[gauss]

The 401k company would report the distribution as taxable.

You would then roll it into the trad IRA and thus not pay any taxes in the current year. (If on the other hand your 401k allowed after-tax contributions and you made any, then your distribution would be reported as only partially taxable).

The 401k company does not know what you do with the money after your receive it (ie keep it vs. rollover). They just need to keep track of the taxable basis. If your plan doesn't allow after-tax contributions, then this should be trivial for them.

-gauss


-gauss