401K rollover IRA mistake with after tax money

[yesiam8833]

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?

[Opus 17]

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?

[yesiam8833]

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]

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 

[yesiam8833]

2023.  No they did not separate the money, thus the problem I'm current in.  The document send by the 401K company had this information.  The check was send directly to IRA bank and they didn't do this and now they can't change it.

[dmertz · Accepted solution]

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.

[yesiam8833]

So what should it be call?  When I ask for this to be fix, they called it recharacterization and it was rejected and they told me I need to talk with a tax advisor.  I trying to find a solution and the best one I got so far was to file form 8606, so when I withdraw I would have a record of the after tax amount in the account.  I don't think ETrade is going to keep it for me.

[dmertz]

You mentioned a rollover of after-tax money from your 401(k).  Because you did not describe this after-tax money as having come from a Roth account in the 401(k), I've assumed that the after-tax funds had been in the traditional account in your 401(k).

Unless ETrade failed to follow explicit instructions to split the rollover into separate deposits into traditional and Roth IRAs, there is nothing to fix with regard to the rollover itself.  The rollover deposit to the traditional IRA was permissible and is irrevocable.

If ETrade failed to follow explicit instructions to split the rollover into separate deposits into traditional and Roth IRAs, then they should be able to correct this as a bookkeeping error.  If they refuse to do that, then you could have a legal dispute with ETrade.

If the rollover remains a rollover of the entire amount to a traditional IRA, it's your responsibility to track the basis in nondeductible traditional IRA contributions that your traditional IRAs acquired via the rollover.  I've already explained how that adjustment to your basis in nondeductible traditional IRA contributions is to be reported.

[fanfare]

You are required to keep copies of all Forms 8606 you file with IRS until your IRA is drawn done to zero.

It is only filed if something is done by you.

@yesiam8833 

According to @dmertz  who is the expert, this error cannot be corrected.

[ I didn't see the comment above about bookkeeping, which is what I said earlier.]