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Backdoor Roth screwup

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  • Backdoor Roth screwup

    husband's old employer rolled over old 401k (~37k) into an IRA at schwab without notifying us last July. We had done a backdoor ROTH conversion with fidelity earlier that year in 2021. Did not notice until this month. Haven't ran all numbers this year, but my guess is our taxable income will land around ~450k. Is there anything that can be done to avoid the pro rata since we didn't know? Thoughts on best options going forward?

  • #2
    I do not see any clear remedies, unfortunately, but I’ll let the tax and retirement experts here weigh in. I wanted to comment that I don’t think it’s permitted for an employer to roll over that large of a balance to your IRA without your permission. The usual maximum that an employer can distribute involuntarily is $5000 from everything I have read. Can you figure out why this happened?

    With that being said, I don’t know what recourse you might have even if your employer violated the rules. Form 8606 is pretty black and white - you have a positive balance in your IRA at the end of the year and are subject to pro rata.

    I’d focus on figuring out what to do with that $37k so your BDRoth this year isn’t screwed up. Can you roll it over to a new 401k?

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    • #3
      Lithium is correct.

      The only way an employer would have been permitted to do this, is if the plan were terminated. However, you should have been given notice that the rollover was pending and the opportunity to rollover to any eligible rollover destination of your choice.

      Are you sure that the old employer had a current address or that you somehow ignored the notice. Those are the two most common reasons for this and not an improper action by the employer.

      Like Lithium, I am unsure if there is any remedy if the old 401k plan did this improperly. The first action is to contact the old employer for an explanation. If it turns out, they committed a plan error, a call to the DOL would be my next step.

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      • #4
        Thanks! Trying to figure out what happened there... husband tried to contact old company multiple times and we haven't heard anything from them yet. We did initially think it was on us since the address with the 401k was an old address (we had changed our address on fidelity when we moved, but didn't realize retirement accounts within fidelity were still under old address..), but husband's old co-worker also wasn't told.

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