Accidently deposited after tax 401k check into checking account....before rolling over into IRA

[jay859]

My wife left her company after 15 years.  She had approx. $75k in her 401k.  We assumed it was all pretax.  However, when talking to the financial institution, they informed her that $50k was pretax, and $25k was after tax. 

The $50k pretax was sent in a check to Fidelity which we deposited in a 401k.

My Questions:

1) The $25k after tax check was made out to her.  I think I made a mistake to advise her to get the check made out to her.  She is not 591/2 and will perhaps have to pay the 10% penalty (there should be no tax as this was already after tax....I think).  Will we have to pay the 10% penalty....but no tax?

2) Since this check was deposited into her checking account, does that NOT allow for the $25k to be rolled over into a new Roth IRA (direct or indirect, or a Mega-Backdoor Roth contribution) and thus avoid the penalty?

3) Any other options?

[SundayInSalem]

It sounds like your wife had a Traditional and Roth 401(k). If the $25,000 was a coronavirus related distribution, it would not be subject to the 10% early withdrawal penalty and could be repaid within three years to an eligible retirement plan or IRA.

Check out this article by law firm Ballard Spahr: IRS Guidance Provides COVID-19 Relief for Participants Taking Retirement Plan Distributions and Loan...

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[jay859]

Thanks for the answer.  Unfortunately the money was withdrawn from the 401k in 2021.  Does the covid exception expire at end of 2020?

[ColeenD3]

Yes, unless the bill is updated.

(4) DEFINITIONS.—For purposes of this subsection—

(A) CORONAVIRUS-RELATED DISTRIBUTION.—Except as provided in paragraph (2), the term “coronavirus-related distribution” means any distribution from an eligible retirement plan made—

(i) on or after the date of the enactment of this Act and before December 31, 2020.

Coronavirus Aid, Relief, and Economic Security Act” or the “CARES Act”

[macuser_22]

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@jay859 wrote:

My wife left her company after 15 years.  She had approx. $75k in her 401k.  We assumed it was all pretax.  However, when talking to the financial institution, they informed her that $50k was pretax, and $25k was after tax. 

The $50k pretax was sent in a check to Fidelity which we deposited in a 401k.

My Questions:

1) The $25k after tax check was made out to her.  I think I made a mistake to advise her to get the check made out to her.  She is not 591/2 and will perhaps have to pay the 10% penalty (there should be no tax as this was already after tax....I think).  Will we have to pay the 10% penalty....but no tax?

2) Since this check was deposited into her checking account, does that NOT allow for the $25k to be rolled over into a new Roth IRA (direct or indirect, or a Mega-Backdoor Roth contribution) and thus avoid the penalty?

3) Any other options?

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There is no penalty for the after-tax money.   You should probably get two 1099-R's one for the before-tax rollover and one for the after tax distribution with a zero taxable amount in  box 2a and the after tax amount in box 5.

The rollover to a Roth must be completed within 60 days of the date io distribution.    "Parking" the money in another account temporarily does not prevent the Roth rollover if within 60 days.

[macuser_22]

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@jay859 wrote:

Thanks for the answer.  Unfortunately the money was withdrawn from the 401k in 2021.  Does the covid exception expire at end of 2020?

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This has nothing to do with COVID whatsoever.    It is an end of employment distribution, not COVID related.