Rollover of Roth 401k plan funds

[FEDUKE404]

Client has separated from employer who offered a Roth 401k plan, and current employer has no such plan.

Employee is in early 50s, and now wishes to move those funds into a "regular" Roth IRA account.

1 -- From an administrative (paperwork) standpoint, do you think there should be any employer problems related to a DIRECT rollover? (I assume Form 1099-R would show code "H"?) Otherwise I assume there would be a code "B" (or possibly code "J"?) distribution, likely with some tax withholding, and then client would have to be very careful to jump through all of the "rollover" hoops to avoid any tax consequences.

2 -- Can the funds from the Roth 401k go into an existing Roth IRA account, or must a new Roth IRA account, titled "Rollover Roth 401k Plan" or similar, be necessary ?

3 -- May I safely assume any rollover funds would not impact the dollar amount of "new" 2017 funds (maximum of $6,500) that otherwise could go into an existing Roth IRA account, after consideration of unknown 2017 AGI amounts?

Thanks for any insight you can offer. This client seems to come up with something each year to "stump the bartender" so I wanted to see if any TTB members have had experience with this process.

FE

NEW: Client just informed me - "stub has Code G"

[kathyc2]

Are there any employer matching funds in the account?

[MDEA]

I would move the money to a regular IRA first and than to an existing Roth IRA. It does not stop client from doing the normal yearly contribution. I believe this makes an easier paper trail.

[FEDUKE404]

Roth 401k plan update

I know nothing about the specifics of the prior Roth 401k plan account. There is a good chance that the employer did contribute "something."

I'm not sure I follow the logic of how establishing a (non-existent) Traditional IRA with the funds, and then transferring everything to a Roth IRA, would make an "easier paper trail." And, if such is done, how does that then avoid a (potentially) taxable distribution from the new Traditional IRA account? Are we dealing with the infamous Form 8606 and non-deductible Traditional IRA contributions ?

For now I need much more info from the client. (This stuff was just dropped on me on Thursday.) Supposedly the funds from the Roth 401k plan are in a "bank account," but then I'm told the (forthcoming?) Form 1099-R is / will show Code G.

Somewhat restating part of my original question: Is it possible to have a **NEW** Roth 401k plan, or is it a matter of when the funds leave the original employer they then can only go into a "regular" Roth IRA account? As noted by kathyc2's comment, it is possible there would need to be some "adjustments" rattling around in the replacement account, and I have no idea how the plan managers track that.

Thanks for the initial responses. I will update as more information becomes available.

FE

[kathyc2]

I know nothing about the specifics of the prior Roth 401k plan account. There is a good chance that the employer did contribute "something."

I'm not sure I follow the logic of how establishing a (non-existent) Traditional IRA with the funds, and then transferring everything to a Roth IRA, would make an "easier paper trail." And, if such is done, how does that then avoid a (potentially) taxable distribution from the new Traditional IRA account? Are we dealing with the infamous Form 8606 and non-deductible Traditional IRA contributions ?

For now I need much more info from the client. (This stuff was just dropped on me on Thursday.) Supposedly the funds from the Roth 401k plan are in a "bank account," but then I'm told the (forthcoming?) Form 1099-R is / will show Code G.

Somewhat restating part of my original question: Is it possible to have a **NEW** Roth 401k plan, or is it a matter of when the funds leave the original employer they then can only go into a "regular" Roth IRA account? As noted by kathyc2's comment, it is possible there would need to be some "adjustments" rattling around in the replacement account, and I have no idea how the plan managers track that.

Thanks for the initial responses. I will update as more information becomes available.

FE

It would make a big difference if there are employer matching funds or not. Although the employee puts in "after tax" money, the employer match is considered pre tax.

If there is a combination of funds, you would need to do 2 transactions. The after tax money and proportional earnings can be rolled to a Roth IRA without tax consequence. The employer contribution and proportional earnings can be rolled to a Traditional IRA. Client can then decide is they want to convert the Traditional (employer portion) to Roth and pay the corresponding tax.

If employer never made a contribution, you can roll the entire amount to a Roth IRA without tax.

[MDEA]

401k

Sorry misseed that it was in a roth to begin with.

[Dusty2004]

Different view

I would find out how much of the money was employee contributions, employer contributions and gains on each.

I would then roll over the employee contributions and gain directly into a ROTH IRA. If you roll it into a Traditional IRA it will make a papertrail nightmare (IMHO).

The employer contributions and gains on that money can either be rolled over to a ROTH IRA and then taxed when return is filed, rolled over to a Traditional IRA and then to a ROTH IRA and then taxed when return is filed.

I would not - under any circumstances, roll the ROTH 401k money over to a traditional IRA.

Dusty

[FEDUKE404]

Updated information of the transfers

I now have gathered more detailed information on the matter at hand.

The person was a long-time employee of Company A, and in late 2016 was released (along with others) due to financial considerations. As a employee, he had a company-funded pension and a 401k plan. There was NEVER a Roth 401k plan in existence.

Upon separation, the company issued three checks in the form "Payable to XYZ Bank F/B/O John Doe" and they were mailed to John Doe at his home address. The checks were issued in late March of this year. Although no Form 1099-R is yet available, each check stub indicated "IRS Distribution Code G." No income taxes were withheld from any of the three distributions. There were two large checks (pension and pre-tax 401k funds) and these were soon placed into two new rollover IRA accounts at XYZ Bank. The third check was much smaller, and was stated to be "100% employee after-tax contributions" from the '401k plan'" with zero earnings. That check apparently was deposited into a regular cash account by XYZ Bank. It is/was the (recent) intent of the owner to put those funds into a Roth IRA account.

There has been some finger-pointing going on, to include the unwillingness of Company A to deal with a "direct" transfer as opposed to writing three checks. (Does the letter of the law allow "Code G" for such an alleged transfer??)

In any case, the client intends to move the forgotten money into a Roth IRA and avail the use of Revenue Procedure 2016-47 if necessary. The "excuses" for the self-certification would likely include Reasons 2(a) and/or 2(b) for missing the 60-day deadline for a rollover. XYZ Bank has assured the client they can direct the funds so they DO appear in the "Rollover Contributions" box of the forthcoming 2017 Form 5498. (Due to income considerations, it is unlikely any 2017 Roth IRA contributions will be allowable.)

Final question that leaves some confusion: From a tax preparer standpoint, it is extremely likely that I will eventually see three Forms 1099-R, each with a Code G for a "Direct Rollover." Does that mesh with the facts stated above, and if so is there really any reason for the client to be concerned with any separate IRS paperwork??

Sorry for the delay, and thanks to those who responded. I believe all of the relevant facts are now corrected and on the table.

FE

[kathyc2]

Final question that leaves some confusion: From a tax preparer standpoint, it is extremely likely that I will eventually see three Forms 1099-R, each with a Code G for a "Direct Rollover." Does that mesh with the facts stated above, and if so is there really any reason for the client to be concerned with any separate IRS paperwork??

In the electronic age, it is unusual to see a paper check, but I don't see anything to indicate it was handled improperly. The check was made to XYZ bank, not to your client. Client could not cash check, and if he wanted to put it in anything other than an IRA account, it would be the responsibility of XYZ bank to report it as a distribution. I would agree than G is the correct code.