Quick 401k Rollover Question

[SLCentral]

Hi guys,

Quick question for you all. I recently quit my job, and in the process rolled my 401k over to a third-party brokerage. My employer also sent me a check for a certain amount in addition to the rolled-over amount. Online, it's referred to as a "Nontaxable Credit Rollover." I know that while at my company some of my contribution was post-tax and some was pre-tax.

I'm wondering what I need to do with this check. Does the 60-day rollover rule apply? I've also read things about an 80%/20% tax implication, but I'm a bit confused TBH. How can I avoid getting double-taxed on this amount in the future?

I'd like to deposit it into my new 401k account along with the rest of my money that was rolled over, but my brokerage doesn't accept checks (Wealthfront). Is there any danger in depositing it into my checking account and then transferring it over? Tax/IRS implications?

Thanks for the help.

 

[Schfifty Five]

First question would be, what is that extra amount that was sent to you via check?

If you had rolled over your 401k contributions into a 3rd party already, why is your company giving you more?

 

[brianmanahan]

i just did this recently. i sent the pre-tax check to vanguard to roll into my traditional IRA, and i just cashed the post-tax check and invested that money in my taxable account.

if you want to transfer it into your new 401k account, i think that would be tricky since it would need to retain its post-tax status. this is possible but you might have to pay tax on the majority of the post-tax amount. i just decided to invest the post-tax amount it in a taxable account, which makes it so the only taxation is a one-time tax on any gains in the post-tax amount. this would be taxed as regular income (which is a higher rate than long term capital gains). in my case, the post-tax actually lost a little money since i had just started investing in post-tax recently, and thus i will owe no tax on it.

at least that's what i expect based on my understanding, and what the documents from the 401k company show. i found out that post-tax 401k contribution is quite confusing, so i probably will not be doing it again.

 

[SLCentral]

First question would be, what is that extra amount that was sent to you via check?

If you had rolled over your 401k contributions into a 3rd party already, why is your company giving you more?

It was a total of ~$17K, $13K of which was transferred over electronically, and $4K was via check, that is in my name.

My understanding is that the $17K was pre-tax contributions, and the $4K was post-tax.

 

[MomentsofSanity]

It was a total of ~$17K, $13K of which was transferred over electronically, and $4K was via check, that is in my name.

My understanding is that the $17K was pre-tax contributions, and the $4K was post-tax.

You can put the 4K after tax dollars into a Roth. Don't commingle it with the other funds.

The 80-20 is if you don't roll over eligible funds into an IRA from a QRP. Normally the 401k would withhold those monies at distribution.

Edit: sorry just to clarify is the money in a new employers 401K or a rollover IRA? Just a mixing of terms used so I am not sure.

 

[MomentsofSanity]

Oh and yes you can cash it and deposit it electronically as longs s it's in 60 days. Your employer plan will issue a 1099R and the broker will send you a 5498 showing the 60 day rollover.

 

[stlc8tr]

According to this guy, no one knows.

https://secure.marketwatch.com/story/rolling-after-tax-401k-money-into-a-roth-ira-2013-12-27

Q. I took a retirement package in 2006 and left my 401(k) in the company. This year, I rolled over my pretax 401K into my traditional IRA account and my after-tax 401K (about $60,000; I have a statement from my employer indicating the amount is after-tax money contribution) into my Roth IRA account. After reading your article "Don't let the pro rata rule trip up your Roth", I wonder if I have to apply the "pro rata calculation" for the Roth rollover for tax purposes? For your information, I rolled over the entire 401K from my previous employer. Thank you — LB

A. Oh LB, you have entered a world of mystery. There is no doubt that many plan administrators are cutting two checks from 401ks, sending an amount equal to the after-tax contributions to a Roth IRA, and the balance to traditional IRAs. How this is taxed, or not, is simply not clear.

Many tax experts interpreted section 402(c) of the tax code in such a way that the $60,000 in your case would be considered all after-tax, and therefore the rollover to the Roth was not taxable. The Pension Protection Act of 2006 authorized direct rollovers from 401ks to Roth IRAs. Prior to this, the rollover would go into a traditional IRA then convert to a Roth, and the pro rata rule I described would apply. Therefore the balance in your IRAs does not appear to affect the taxability of the rollover and conversion to the Roth.

Unfortunately, this new ability had many asking similar questions to yours. Some responders said what you did was correct; others would tax the $60,000 transaction based on a pro rata treatment of the $60,000 versus the total 401(k) balance. Others advocated pro rata treatment of $60,000 versus the balance attributable to the after-tax subaccount within the 401(k). Internal Revenue Service Notice 2009-68 was supposed to give guidance but it appears to have only made things more confusing.
The American Benefits Council wrote a letter disputing the IRS interpretation, criticizing the guidance on the grounds that it was incomplete, caused problematic rollover situations, and is contrary to the evolution of IRA rollover rules. The council believes the notice is different than the IRS's reading of Section 402(c)(2). Many other tax experts have also stated that this was an incorrect interpretation by the IRS, but nevertheless the IRS has not come out with any new guidance on the issue.

Other than attempting what you have already done, the most common approach stems from an interpretation from tax expert Kaye Thomas that is a bit clunky and is based upon the long standing ordering rule for an outright distribution. You would need to receive the entire 401(k) balance as a distribution payable to yourself and use the 60-day rollover rule to first move the pretax funds to a traditional IRA and then move the after-tax funds to a Roth IRA. The difficulty here is the 20% mandatory withholding, so the person would have to come up with the 20% out of pocket to complete this successfully.

If that sounds confusing, I am probably writing it correctly. I wish it was clearer. Some ordering rules from IRS are clear enough to work with (such as distributions from Roth IRAs) but this not one of those cases. If you take one of the more aggressive approaches, be sure your tax preparer is capable of making your case in the event of an audit.

 

[SLCentral]

You can put the 4K after tax dollars into a Roth. Don't commingle it with the other funds.

The 80-20 is if you don't roll over eligible funds into an IRA from a QRP. Normally the 401k would withhold those monies at distribution.

Edit: sorry just to clarify is the money in a new employers 401K or a rollover IRA? Just a mixing of terms used so I am not sure.

New money is in a rollover IRA. The $4K is sitting on my desk in check form to my name.

It sounds like this is an ambiguous situation - I'll just create a Roth IRA and deposit it there.

 

[MomentsofSanity]

New money is in a rollover IRA. The $4K is sitting on my desk in check form to my name.

It sounds like this is an ambiguous situation - I'll just create a Roth IRA and deposit it there.

If you have a licensed tax professional the best thing would be to consult them as ultimately they will be the one justifying your actions. As a broker and IRA specialists I have seen this scenario quite a few times but honestly there can be questions you need to ask the former plan administrator that you won't have a clue about.