Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
Problem with tIRA Reverse Rollover into 401k
Posted by: TaxingInquiry, May 3, 2017 04:58AM
What advice would you recommend where, for a person starting out with a $0 balance in their tIRA, they did not file any Form 8606 for 2014-2016:

(1) In early 2014, a person makes a $5500 nondeductible traditional IRA ("N-tIRA") contribution for 2013;

(2) In early 2015, that person makes a $5500 N-tIRA contribution for 2014;

(3) In late 2015, the person transfers ~$14,000 ($3000 of which were market gains) to a 401(k) at that person's current job, leaving a traditional IRA balance of $0 (the "reverse rollover");

(4) In early 2016, the person made a $5500 N-tIRA for 2015 (shortly thereafter they this to a ROTH IRA with no gains); and

(5) In early 2016, the person made a $5500 N-tIRA for 2016 (again converted this amount to ROTH IRA later in the year with a minor taxable gain).

The reverse rollover was a mistake because they rolled after-tax money into the 401(k). Unless the reverse rollover is unwound, the basis on the Form 8606 will not make sense. What steps would you recommend in response to this situation?

Re: Problem with tIRA Reverse Rollover into 401k
Posted by: Alan S., May 4, 2017 02:07AM
The situation is a real mess because there are some gray areas here.

First, the failure to file the 8606 violates IRS rules per Sec 408(o), therefore this failure more than likely cannot be used to treat the IRA as having less basis than it actually would have if the 8606 forms were correctly filed. This means that IRA basis WAS rolled into the qualified plan in violation of the pre tax limit limitations of those rollovers.

The plan should be notified of the basis amount rolled over, and the plan should then distribute the ineligible amount with allocated earnings. However, these excess contributions (11,000) to the plan are not eligible rollover distributions when distributed from the plan, so cannot be rolled back into the IRA, although this is also a gray area. Further, the omitted 8606 forms should be filed with the IRS for 2013 and 2014 as well as 2015 and 2016. The 2016 return would have to be amended as the 8606 reporting the 2016 conversions would have incorrect amounts.

I don't know why the 401k rollover was done in the first place since there was only 3,000 of pre tax dollars in the IRA. This may have been done based on back door Roth recommendations that do not apply when the pre tax amount is so small. The 14,000 should just have been converted to a Roth and taxes paid on the 3,000.

Re: Problem with tIRA Reverse Rollover into 401k
Posted by: TaxingInquiry, May 12, 2017 12:50PM
Thank you Alan for your detailed response. In hindsight this shouldn't have been done this way. What a headache.

What is your best guess as to what will happen to the $11,000 (plus gains on that $11,000) when the 401k plan distributes the money out of the 401k?

They will have to issue a distribution form letting the IRS know and then where will they send it? If they send it back to the tIRA provider, you're saying that this isn't possible although it is a gray area. Have you ever seen this transaction unwound that way?

If it isn't sent back to the tIRA provider then it just gets sent back to the person and they pay taxes on the $11,000 in gains or the full $11,000 plus the gains? If the correct 8606 forms are filed this should at least let the IRS know that the 401k distribution wasn't all pretax money. Maybe there is a part of the distribution form that the 401k provider can fill out that lets them know that they are unwinding this due to post-tax money being rolled into the plan incorrectly.

Thank you again for your thoughts and detailed response. I really appreciate it.

Re: Problem with tIRA Reverse Rollover into 401k
Posted by: Alan S., May 13, 2017 03:23PM
I don't think there is any consistency on how this is handled, although RR 2014-9 [] does clarify that the excess and gains are to be distributed.

I have not located specific guidance on the 1099R coding for this distribution, but any excess amount rolled into a plan is not eligible for rollover when distributed out of the plan. I think that the 1099R issued by the plan should show only the gains on the excess as taxable, not the excess itself and coded E, 8, or P to denote a corrective distribution. And if the 1099R shows the entire amount as taxable, the person could report the 11,000 portion as non taxable with an explanatory statement which includes copies of the 8606 forms, which should be completed and sent to the IRS separately ASAP.

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