By Andy Ives, CFP®, AIF®
Hello, I have heard Ed speak at several different Wells Fargo events and he spoke one time about clients who over contribute to their 401(k). I believe there was a strategy where they can move the excess to an IRA. Can you tell me where to find more info on this strategy?
There is no strategy to move an excess 401(k) contribution to an IRA. To avoid being taxed twice, excess plus earnings attributable must be removed by April 15th of the year after the year the excess was contributed. There is no way to “fix” it with a rollover or some other transfer as the excess is ineligible to be rolled over. The combined allowable amount contributed to a 401(k) by employer and employee is $56,000 in 2019 ($62,000 over age 50), and that cap cannot be breached. [There’s also a separate limit on 401(k) elective deferrals.] However, maybe you were referring to another strategy we discuss – the Mega Back-Door Roth. The Mega Back-Door Roth strategy allows a person to contribute after-tax (non-Roth) dollars to their 401(k), assuming the plan allows it, and then to immediately rollover/convert those dollars to a Roth IRA. A person using the Mega Back-Door Roth strategy is still bound by the maximum contribution limits to a 401(k), but it does allow them to move money into a Roth IRA that exceeds the annual Roth IRA contribution limits ($6,000, plus $1,000 over-50 catch up in 2019). Be aware – the 401(k) plan must allow for after-tax contributions and for in-service distributions. Not all do.
My client’s mother died after her RBD in 2016. Her IRA had no designated beneficiary. My client was named personal representative of the estate and went through the probate process. He is the sole heir of the estate. The broker/dealer that held his mother’s IRA refused to retitle her IRA into an estate-owned beneficiary IRA and also refused to move his mother’s IRA into a beneficiary IRA for my client. They told him the only thing they could do is cash out the IRA and move the holdings in-kind to an estate-owned brokerage account. Is it legal to deny a probate-determined heir the stretch IRA?
They’ve already cashed out the IRA and moved the holdings in-kind to the brokerage account. This just happened recently. If what they did was illegal, can this be reversed? Do we have to get FINRA and/or state securities regulators involved?
It is not illegal for a custodian to require a beneficiary to take a lump sum distribution, but it is rare. Most allow a stretch IRA to be established. The custodial document will outline what their policies are. To avoid situations like this, it is recommended that clients and advisors understand what their custodian will and will not allow. At this point there is no going back as the lump sum distribution has already been made. However, if the custodian had allowed a stretch, based on the fact that that the client’s mother died after her required beginning date and there was no designated beneficiary, the rules are clear. A stretch IRA is permitted over the remaining non-recalculated single life expectancy of the mother (had she survived).