Two Rollover Checks | Ed Slott and Company, LLC

Two Rollover Checks

I had a 401k that i rolled over from Vanguard to my Financial Advisor. Seems after many years there was some post tax money in there. So they cut 2 checks. One big one which is eligible for rollover and then this small one for $20k which is post tax. I'm not 59 1/2 yet so what do i do with the post tax check? Can i just go and spend it? Or do i have to roll it into a separate IRA until i'm 59 1/2?

  • If you received the check within the last 60 days, you can roll it over to your Roth IRA with no taxes due. Of course, you can also spend it or put it in savings, but only a Roth IRA will generate eventual tax free gains, and there are no RMDs. Do NOT roll the after tax check into a traditional IRA as that will result in pro rating distributions for life.
  • If you did not request a direct rollover of the pre tax 401k balance, then 20% would have been withheld for federal taxes. In that case, you would have to replace that 20% with other money to avoid tax and penalty on the amount withheld. But I would not use the 20k check to complete the pre tax rollover if you can avoid it. The pre tax distribution should have been a direct rollover to avoid the withholding hassle and to have the entire pre tax check deposited into a traditional IRA. Not sure why your advisor did not tell you that unless there was some need to beef up your withholding, but with a full rollover of both checks there would be no tax due.

I think everything was done correctly. There was no withholding on anything. It was done as a rollover. The question is on the POST TAX piece. IT was not ROTH 401K money. It was post tax money from way back when. I dont think youre supposed to roll that into a ROth IRA. If i just put it in the bank- will i get hit with a 10% penalty for withdrawing before 59 1/2?

If you do not need the after tax funds in the near future, the best option is to roll it into your Roth IRA as a tax free rollover contribution. If you do not want to, the distribution will still be tax and  penalty free, and you will get a 1099R next January showing no taxable amount. Apparently the pre tax portion was done as a direct rollover or there would have been withholding taken out. 

 

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