Rollover of after-tax dollars

[Guest bmurphy]

Client recently discovered that a rollover done in 2002 from 401k to IRA included after-tax contributions. 401k provider did not code the 1099-R correctly to reflect this. Does client have the option of having the distribution corrected so the after-tax monies go to a taxable account? Guessing thiswould probably create more headaches than it's worth. If funds must stay in the IRA how are they treated with regards to taxation & IRS penalty (client is under 59 1/2)? Client is looking to take a distribution & would like to get out all of the after-tax funds first, if possible.

[Appleby]

I am curious- how was the 1099-R coded?

Since after-tax funds became rollover eligible (under EGTRRA), there have been numerous individuals who have unwittingly elected to rollover their after-tax amount to their IRA, without realizing that one can’t just select the after-tax amounts for distribution from the IRA. After the amount has been rolled over to the IRA, there is no means of 'correcting' the transaction, because after-tax finds are now rollover eligible. (Prior to 2002, the after-tax amount would be removed as a “return of excess contribution”).

Going forward, distributions from any of your client’s traditional IRA will be prorated to include a portion of the pre-tax and after-tax amounts- same principle when non-deductible contributions are made to the IRA. IRS Form 8606 and the instructions (for Form 8606) provide step-by-step instructions on figuring the amount attributable to after-tax VS pre-tax. Withdrawals attributable to after-tax amounts will be tax and penalty-free- the balance will be subject to ordinary income tax and the 10-percent early distribution penalty.

IRS Form 8606 is available at www.irs.gov

[Guest bmurphy]

Appleby,

Thanks for the reply. The 401k custodian coded the entire amount as G (rollover). The after-tax amount was not listed on the 1099-R.