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I've recently discovered that E-trade rolled over my 401k into a cash account, instead of a IRA account, as I intended. The rollover happened one year ago.

The 401k administrator sent me a tax document reporting a regular rollover, and that is how I did my taxes at the beginning of the year. They also understood the intention was a rollover. The amount is close to $100k. The money was invested by e-trade (managed account) and I never cashed or deposited any amount on that account (I was thinking it was an IRA).

E-trade says they are not responsible, and there is nothing they can do for me. And that I should look for a CPA and fix my issues with IRS.

What should I do? Take the loss and pay all taxes and penalties? Sue E-trade? Other? Is there any way I can get the money back into an IRA?

Thank you for any advice!

  • I usually do see a lot of free financial resources around as well. So depending on where you live, google around for any financial related assistance in libraries, local community centers etc. Usually you may be able to get an appointment there with a financial advisor face to face and can perhaps speak to him on this concern. – pal4life Oct 25 '16 at 4:22
  • Some banks also provide assistance to balancepro.org which is actually a San Francisco based non profit, I have spoken to them in the past and they do provide some financial assistance as well - balancepro.org – pal4life Oct 25 '16 at 4:25
  • When the transfer occurred, what paperwork did you receive? – JoeTaxpayer Oct 25 '16 at 16:04
  • Hello Joe, did not receive any paperwork regarding the type account at the time of the transference (no emails, no mail). The paperwork I have is related to the Account Management Service that I contracted from them. That paperwork does not mention what type of account it is. The whole transaction was done over the phone, and money went directly from trustee to trustee. And during next tax season the former 401k admin provide tax document showing a regular rollover. – nano Oct 26 '16 at 7:27
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Here's the detailed section of IRS Pub 590

It looks like you intended to have a "trustee to trustee conversion", but the receiving trustee dropped their ball. The bad news is, a "rollover contribution" needed to be done in 60 days of the distribution. There is good news, you can request an extension from the IRS, with one of the reasons if there was an error by one of the financial institutions involved.

Other waivers. If you do not qualify for an automatic waiver, you can apply to the IRS for a waiver of the 60-day rollover requirement. To apply for a waiver, you must submit a request for a letter ruling under the appropriate IRS revenue procedure. This revenue procedure is generally published in the first Internal Revenue Bulletin of the year. You must also pay a user fee with the application. The information is in Revenue Procedure 2016-8 in Internal Revenue Bulletin 2016-1 available at www.irs.gov/irb/2016-01_IRB/ar14.html. In determining whether to grant a waiver, the IRS will consider all relevant facts and circumstances, including:

Whether errors were made by the financial institution (other than those described under Automatic waiver , earlier);

Whether you were unable to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, or postal error;

Whether you used the amount distributed (for example, in the case of payment by check, whether you cashed the check); and

How much time has passed since the date of distribution.

You can also see if you can get ETrade to "recharacterize" the equity position to your desired target IRA. The positive here is that the allowed decision window for calendar year 2016 rollovers is October 15 2017; the negatives are this is irrevocable, and restricts certain distributions from the target for a year (unlikely to impact your situation, but, you know, "trust but verify" anonymous internet advice); and it requires ETrade to recognize the original transaction was a rollover to a Roth IRA, which they currently don't. But if their system lets them put it through you could end up with the amount in a traditional IRA with no other taxable events to report, which appears to be your goal.

Recharacterization FAQ

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I do a lot of my own legal work, even sued the IRS, and I always win**. I would not attempt to do this myself. I'd run straight to a tax professional***. But if I did attempt this myself...

My position is that I did a 401K to IRA rollover in good faith. Such a rollover is perfectly common. eTrade saw the paperwork and knew I was rolling over a 401K, and knew or reasonably should have known this rollover would be to an IRA, since rolling over to a cash account is a completely insane act which no-one would ever do. I would gather and prepare to present every document that supports this notion in any way.

I would then take a hard look at my documentation and see how well I can support that argument.

Then I would research cases in tax court to see how the courts treated situations like yours.

I would not roll over the money to another IRA account until I had done that. And I would move quickly.

This is a hard problem and there are no pat answers. It depends a lot on the finer details.

One last thing. Next time you do a move like this, start small. Move $2000 over.


** My real skill is swallowing my pride and knowing when I'm wrong. I settle those, and only fight the guaranteed winners.

*** This is not the usual SE kneejerk of "hire a professional". I almost never do; but I would here. It's an arcane area. Also acting on a professional's advice is a "get out of jail free" card regarding penalties or punishments.

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    Caveat for all readers including @FSiscar: Stack Exchange is not the place to go for legal / tax advisory. Reader beware from advice on the internet. – Mindwin Oct 25 '16 at 13:15
  • I'm definitely considering and working on this, since so far I was not able to find a CPA/lawyer that wants to take the case on. Thank you Harper. – nano Oct 26 '16 at 7:39

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