By Jonnelle Marte
Question: I rolled over my 401(k) into what I thought was an IRA but I just found out that my money has been in a non-IRA brokerage account the whole time. What should I do now?
Answer: First, know that you are not alone. This mistake is not uncommon, experts say. Your first step is to figure out if you paid taxes and penalties when you moved the money out of your 401(k), says Ed Slott, an IRA consultant in Rockville Centre, N.Y. Check your income tax return for that year. You should have received a Form-1099 that showed your taxable distribution, says Slott. Your tax return would also show if you paid taxes on that income. Chances are the Internal Revenue Service withheld 20% of your savings when you took the money out of the 401(k) to cover penalties and taxes.
To roll over a 401(k) without a hitch, you have 60 days after taking the money out of the 401(k) to move it into another tax-advantaged account such as an IRA or another 401(k). For those who make a mistake and end up in your situation, you may be able to correct the error and avoid the tax bill by applying for a private letter ruling, whereby the IRS offers guidance on your particular issue.
A ruling in your favor could allow you to move the money into an IRA after the fact, says Slott. However, the process can take six to nine months and may cost up to $10,000 in fees due to the IRS and any adviser hired, he adds. Depending on how much you have saved, it may make more sense to leave the money in the non-IRA brokerage account, especially if you’ve already paid taxes due, says Slott. If you want to move that money into a retirement account, SmartMoney offers a calculator that helps you choose the best IRA and a retirement calculator to help you calculate if you are saving enough for retirement.