HELP! I converted my old 401k to a ROTH IRA - major tax bill looming

Investing
1

Longtime Clark fan - new on the message boards here, which I found during my panicked web-searching.

I had a 401K with my old employer that I just rolled over to a Roth IRA with Vanguard, completely unbeknownst of the tax implications. (Neither The Standard nor Vanguard expressed verbally or in writing the implications of this).

2 checks were sent by The Standard to Vanguard:

  1. $37,244 of Roth 401k dollars to the new Vanguard Roth IRA
  2. $139,507 of traditional 401k to the new Vanguard Roth IRA

The distribution was approved by The Standard November 15th & funds were deposited into the Vanguard Roth IRA account November 19th.

No funds have yet been selected aside from Vanguard’s default “Federal Money Market Fund”

Recognizing the error now, I have asked Vanguard to allocate $139,507 to a traditional IRA and keep the $37,244 in the Roth IRA.

They have refused and also will not provide an explanation as to why.

In my own research, I have found the Tax Cuts and Jobs Act (TCJA) of 2017 has banned “recharacterizing” the account balance of a Roth IRA back to a traditional IRA. I am speculating that this is why Vanguard refuses to cooperate, but the fact no explanation is even offered speaks volumes of this company. Low fees seem to = zero service.

Regardless, between State & Federal taxes, I am looking at a $44k tax bill come Spring.

I do not have that type of money kicking around in savings, thus any suggestions are welcome.

I understand that the IRS permits 60-days to reinvest retirement money into a new plan w/o penalty. My thoughts are to immediately have Vanguard send me a check for the balance of my Roth IRA account and then just as quickly, open up a traditional AND Roth IRA with a new institution so those funds can be properly allocated.

I am looking for a fee only financial advisor as well to hopefully connect with today for their thoughts, but any advice that can be offered is appreciated.

2

You intentionally asked that the traditional 401K be moved to a Roth IRA? Is that correct?

Or did you ask that your 401K accounts be moved to IRAs, and assumed Roth would go to Roth, traditional to traditional? But they sent everything to the Roth?

3

Unfortunately, I requested it all go to the Roth IRA. I admit error.

Only reason I caught this was because I called Fidelity and was looking to also move an old 401k simply to consolidate everything and then I was asked about tax implications.

Would have been nice if The Standard or Vanguard took that brief moment to ask that single question as it was clear what I was doing with both parties.

4

You need to start looking for $44k to pay your impending tax bill. Maybe the new Roth account?

It’s probably a waste of time, but you might ask The Standard for proof that they informed you that the transfer of funds was a taxable event.

Beyond that, $44k probably won’t buy you enough lawyer time to prevail in a legal action.

Added: To avoid an additional tax 2024 tax liability, you might also want to make sure you have prepaid or witheld 110% of the total amount of your 2023 FIT, that will put you in “safe harbor” status for 2024 FIT.

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5

Correct me if I’m wrong, but isn’t the fund making the rollover required to withhold and pay taxes when they will be triggered?

6

It may be the fund manager’s practice to ask, but it’s not required by law. Prepayment of FIT is the burden of the taxpayer. Some fund managers may require a minimum of withholding but many will make an exception for zero witholding if you request it.

7

I rolled over a much smaller 401k (Roth) to my Vanguard Roth.

Only the company match was taxable (it hadn’t been taxed), while my portion had already been taxed for the Roth. You probably know this already.

Something else I learned when I started doing 403b to Roth conversions -

For my state tax, MY contributions were already taxed by my state. So, for my state’s tax calculation for how much of my 403b is taxable, I have to do my contributions/total value = percent and that is NOT state taxable!
Luckily, I had records of my contributions each year and paystubs to show that my contributions were part of my taxable income, so the calculation is easy to do each year that I do a Roth Conversion.

Your state may vary, but it means you might not have to pay tax on the whole amount converted, if your state already taxed your contributions at the time.

Good luck with your situation!

8

Added: To avoid an additional tax 2024 tax liability, you might also want to make sure you have prepaid or witheld 110% of the total amount of your 2023 FIT, that will put you in “safe harbor” status for 2024 FIT.

Great idea there. Maybe you can still do a quarterly tax payment through IRS Direct Pay, if you haven’t withheld enough?

9

When I started rolling over my 403b to Roth (a portion each year), the fund manager was immediately going to withhold 20% of my 403b for taxes. I told them that I wanted to pay quarterly taxes and keep all of my savings intact, which is what I do. But it was definitely a safeguard in case someone didn’t know it was taxable.
I’m kind of surprised that the fund manager didn’t give notice that it’s a taxable event.

10

Update -
My discussions with Vanguard continued to go nowhere yesterday & a representative proclaimed “we’re only showing 1 check being received” (for the proper amount - but not 2 checks). I thought this was equally strange as I paid The Standard $60 per check for the overnight mailing.

In any event, I call The Standard yesterday & the gentleman was helpful.

He provided a letter outlining the dollar amount of my pre-tax contributions being rolled over & the Roth contributions. Also provided were 2 check copies, both referencing my account # with Vanguard on the memo line, but only 1 noting “ROTH”.

How this did not trigger at least a phone call from the Vanguard representative handling this is absolutely reprehensible. But even more so has been their refusal to correct a simple human error.

I have now sent a certified letter to Vanguard with the supporting documents & my full expectation is that this will be corrected.

I will keep everyone posted & hope to share my story on Clark of “customer no service”

1 Like
11

Which account number? The Vanguard account number or the Standard account number? I don’t see that you mentioned opening a traditional IRA at Vanguard before this occurred. At Vanguard, a Roth IRA and a traditional IRA have different account numbers. If both checks had the account number for the Vanguard Roth IRA, but only one said “Roth” on the memo line, then Vanguard probably handled it correctly by depositing both in your Roth. I wouldn’t necessarily expect a call just because the memo line doesn’t say “Roth,” but if someone noticed the difference between the two checks they might call before proceeding.

13

This reminded me of something that happened to me about 20 years ago. I had a small 401k with an employer. I left for a new job and left the 401k there.
Then at some point, they said I’d have to move the money, and I made arrangements to do a rollover to an IRA. But instead, they sent me a check, which would count as a distribution/taxable event + penalty. I contacted them, and they cancelled the uncashed check and processed my rollover. It worked out fine.

I wonder if there’s a way that your previous fund manager could do something like this?
I’m pretty sure Vanguard can’t because they only received the money – they don’t know the tax status of that money. But maybe your original fund people could “undo” and then “redo” the transaction, especially being so recent?

Of course, there may be legal reasons why they can’t do this…

Just a thought.
Good luck.

15

This is an off the wall suggestion but it might help.

Talk to your employer and see if they will defer the rest of your 2024 pay and especially bonuses into January 2025. This would’ve been more helpful if done earlier in the year, but you have one pay period left.

Don’t do anything else in your tax life which will cause gains… and go out of your way to try to harvest investment tax losses while you still have time before 12/31/2024 to do it.

Good luck.