Hi all,
I've got one that I've never seen before....
A client of mine has an old 401k with a previous employer. Her husband has an IRA with my firm. Unbeknownst to me, the 401k custodian contacted the wife and notified her that they were forcing distributions on small accounts. Thus, she had the money rolled into her husband's IRA!!! How this criss-cross got passed my IRA custodian is another matter entirely. They should have noticed that the name on the check didn't match the name on the IRA account. But I'm 100% positive that my clients didn't realize that they weren't supposed to do this.
In the meantime, I'm trying to figure out how the taxes are going to shake out and how I need to fix this.
The wife will get a 1099-R from the 401k custodian that is coded "G" in box 7, because all the 401k custodian knows is that they made a direct rollover to an IRA (that they believe is) owned by the participant. Correct?
And the husband will get a 5498 from the IRA custodian that shows his contributions in box 1 and the rollover in box 2. He'll take a deduction equal to box 1. By the way, they are well below his annual contribution limit and the "rollover" was only $400.
So is there a net taxable difference between doing it the right way and doing it the wrong way (a.k.a - their way)? Did they cheat the IRS out of the 10% early withdrawal penalty? What's the proper way to "unwind" and/or fix this?
And lastly, I'm not advocating tax evasion, nor will I recommend it to the clients, but I know they're going ask "how will the IRS know"? It's a question that intrigues me as well.
thanks in advance!