Excess contribution to a 401k then rolled over into an IRA

Question

Hello experts,

I filed my 2023 taxes on April 2024. I included a 1099-R for rolling over my 401k into my Traditional IRA. Few days ago (end of December 2024) I received a 'duplicate' 1099-R for the tax year 2023 from the 401k administrator, where now a portion of the funds got recharacterized as 'not eligible' (about $4,600) . The reason, as I understand it, is that later in 2023, the company I worked for in 2023 went out of business, and their 401k play year was cut short, making some of the contributions not eligible for 2023. And again since the 401k plan was terminated, I had to rollover the 401k funds into an IRA quickly ( at the end of 2023). Now I find myself with: a) an excess 2023 contribution into a 401k that got dissolved b) a 2023 rollover into an IRA that had a $4600 or so as not eligible funds. Since I just found out, it is too late now to undo these contributions in time to avoid consequences. So, two questions please:

First:

I understand that I will have to amend my 2023 returns, to include the new 1099-R with the taxable portion. Not fun, but I do not see any other choice. Right? My only question about this part is: why do they call the new 1099-R 'duplicate' and not 'corrected'? TurboTax does ask me if the new 1099-R forms are 'corrected' forms. I am tempted to say 'yes' but technically they have a 'duplicate' box checked and no 'corrected' box that I can find. So are these forms 'corrected' or not?

Second:

what do I do with the portion rolled over into the Trad IRA? Do I take it out as excess contribution with its earnings? If so, the current IRA administrator will code that entire distribution as due to 'excess contribution for 2023' and the entire amount might become taxable to me again (instead of just the earnings portion'. Even if I tell my current IRA administrator not to apply any tax withholdings, how do I enter in Turbotax that the principal portion that I am taking back had already being taxed by the 1099R corrected/duplicate? Do you recommend a different way to go with regards to the IRA?

Thank you very much

dmertz · Accepted Answer

Again, thank you so much for your comments.

Indeed, code E distribution is due to a return of contributions and attributed earnings that were deemed to be excess due to the plan not being in compliance, because the plan did not have a full 2023 of 'life' (since my employer unexpectedly went out of business before the end of 2023). So the max annual allowable contributions got prorated (after I had already max-ed them out), and we ended up with an over-contribution. At least this is what I think I understood so far.

The preliminary course of action you described below makes sense thank you, and indeed I would also love to hear from other super-experts.

As we wait, maybe you can share your opinion on a couple of odd things for me:

1) TurboTax asks if the new 1099-Rs have a 'corrected' box checked. I would expected that they would, as indeed the 1099-Rs are a revision of the previous one. But instead they have a 'Duplicate' box checked (there is not a 'corrected' box available in the 1099-Rs). To me, it seems that are indeed corrected 1099-Rs. Not sure why they called them 'duplicate'. Do you think I should answer 'yes' to the TurboTax question: " Do these forms have the 'corrected' box checked?

2) I suspect that I will have to include in my 2023 amended return the distribution from the IRA of the $4600 and its earnings as excess 2023 contribution. Is there a way in TurboTax t explain that the the $4600 portion is not taxable since I have included its taxation with the new 1099-R , in the same 2023 amendment??

Thank you thank you.

The second code-G Form 1099-R should be shown as a CORRECTED Form 1099-R unless the original was never filed with the IRS, in which case the instructions that came with the second code-G Form 1099-R should have said to ignore the original. Either way, only the second one of these two is to be used in preparing your amended 2023 tax return. The code-E Form 1099-R needs to be reported on the tax return for the year of the form and, since this was a return of a tax deferred contribution, it's entirely taxable.

Because the $4,600 was ineligible for rollover, it became an ordinary contribution to your traditional IRA despite how the IRA custodian might have reported it. If it would not result in an excess regular contribution, you would generally treat it on your amended 2023 tax return as a regular traditional IRA contribution (since, treated as a regular contribution, it would not be an excess contribution). This might result in the contribution being a nondeductible contribution required to be reported on 2023 Form 8606 Part I. This would result in not being subject to any excess contribution penalty on a 2023 Form 5329 that would otherwise need to be included with your amendment.

Opus 17 · Answer

What is different about the original and second 1099-R? Specifically, what is in box 1, 2a, and the code(s) in box 7? And, if box 1 changed, how much did you actually rollover, the amount in box 1 of the original 1099, the new 1099, or something different?

I believe I know the answers to your other questions, but I don't understand why or how they issued a new 1099-R. Even if the contributions were ineligible, they were still there, and part of the withdrawal/rollover. I want to know more about that before I answer the rest.

@dmertz