401K rollover IRA mistake with after tax money

Forum|Forum|2 years ago
February 28, 2024
2 replies
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In 2013, I rollover my 401K to an IRA, but the 401K had after tax money. I contracted the company that is holding my IRA account and they indicate they can't recharacterize the after tax money to an Roth IRA account. What do I need to do so I don't pay taxes when I withdraw the after tax money from the IRA account?

Best answer by dmertz

Once deposited in the traditional IRA account, the after-tax money from the 401(k) becomes basis in nondeductible traditional IRA contributions in your traditional IRAs.

The next time you are required to file From 8606 Part I, you'll need to include on line 2 with explanation the amount of basis acquired from the 401(k). In TurboTax you'll answer that you made nondeductible contributions to your traditional IRAs, click the EasyGuide button, then mark a checkbox to indicate that you rolled over after-tax money from an employer plan. TurboTax will prompt you to provide an explanation for this adjustment to your basis.

Opus 17

Employee

Do you mean 2013 or 2023?

The 401k trustee should have separated the money into two transactions, before and after-tax. That way the new IRA bank would put the pre-tax money in a traditional IRA and the after-tax money in a Roth IRA. Can you determine if the error was made by the 401k custodian in sending the money, the IRA custodian in receiving the money, or did you give the IRA custodian incorrect instructions?

yesiam8833Author

It was mistake by both, the 401K company didn't split the money into two checks, but they did send the documentation to IRA company(Etrade), but they didn't split the money into 2 accounts (IRA and Roth IRA). Now IRA company can't split the money due to IRS rule changes in 2018 for recharacterization is no longer allow.

fanfare

Employee

E-Trade correcting its error is not a recharacterization,

The 2018 rule change applies to conversions, initiated by you.

You did a trustee-to-trustee transfer.

You are trying to go into the Roth IRA, not out of it.

The rule applies only to recharacterization back from a Roth to a Traditional IRA

@yesiam8833

dmertzAnswer

Employee

Once deposited in the traditional IRA account, the after-tax money from the 401(k) becomes basis in nondeductible traditional IRA contributions in your traditional IRAs.