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ROTH 401K to ROTH IRA rollover

Forum|Forum|2 years ago
January 7, 2024
2 replies
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I've seen a similar scenario but not my exact situation.

In 2022 I had a ROTH 401K account with TD Ameritrade. I accidentally overcontributed to it...not by maximum contributions of 27000 (which I did) but turned out after payroll taxes at the EOY I wound up $3800 over. I have a solo401k and contributed based on expected salary but fell short and didn't catch it on the W-2 (43000 earned, 27000 contributed but turned out 3800 over after calculating withholding and SS).

TD Ameritrade then told me they were discontinuing ROTH 401k accounts and I was forced to rollover to a ROTH IRA. Only caught it this week when checking last year's contributions and making sure I did everything right. Regardless, the overcontribution and subsequent earnings still remains in the ROTH IRA today.

As a ROTH 401k what do I do? does the excess become ineligible to rollover to the ROTH IRA and become taxable for the 2022 tax year of the rollover? In addition to excise taxes of 6%? If I withdrawl the funds now - which I intend to do. Or do I pay income tax on the excess contributions and earnings from them and then deal with 6% excise tax (and possibly 10% early withdrawl penalty)? I'm past the excess contribution distribution timeline.

Best answer by dmertz

A rollover from the Roth 401(k) to the Roth IRA is indeed a distribution from the Roth 401(k). Because it's too late to obtain are return of the excess deferral, the deadline was April 15, 2023, the excess Roth 401(k) contribution and attributable earnings are, as you mentioned, taxable when distributed and are ineligible for rollover.

It's unlikely that TD Ameritrade will know anything about the excess contribution and be able to distribute the excess and attributable earnings to you as a taxable distribution instead of rolling them over unless you tell them about it. Even if you tell them they might not be able to do so and you would have to submit substitute Forms 1099-R to properly report the distribution. If the excess and attributable earnings end up the Roth IRA, they will need to be removed by a removal of excess contribution before the due date of the tax return, including extensions, for the year in which the deposit into the Roth IRA is made or treated as a regular Roth IRA contribution for the year in which the deposit is made.

J

jaymax69Author

I've read in the case of a ROTH 401k you pay income taxes on excess contributions and earnings in the year you make a distribution not the year it occurs - Im just not sure if this applies to the ROTH IRA rollover. I don't believe the rollover constitutes a "distribution" in this case. So presumably the distribution only occurs when I remove it from the ROTH IRA. If I remove the excess plus all earnings as income tax in 2023 does that satisfy the excess contributions rules or must I still pay 6% excise tax for every year it remained in the ROTH IRA?

D

dmertzAnswer

Employee

A rollover from the Roth 401(k) to the Roth IRA is indeed a distribution from the Roth 401(k). Because it's too late to obtain are return of the excess deferral, the deadline was April 15, 2023, the excess Roth 401(k) contribution and attributable earnings are, as you mentioned, taxable when distributed and are ineligible for rollover.

It's unlikely that TD Ameritrade will know anything about the excess contribution and be able to distribute the excess and attributable earnings to you as a taxable distribution instead of rolling them over unless you tell them about it. Even if you tell them they might not be able to do so and you would have to submit substitute Forms 1099-R to properly report the distribution. If the excess and attributable earnings end up the Roth IRA, they will need to be removed by a removal of excess contribution before the due date of the tax return, including extensions, for the year in which the deposit into the Roth IRA is made or treated as a regular Roth IRA contribution for the year in which the deposit is made.

J

jaymax69Author

1: So I must now ammend my 2022 return and pay regular income tax on the excess contributions and earnings at the time of rollover/distribution? In this case would a 10% early withdrawl penalty still apply?

2:It's too late to remove the excess contributions/earnings to the ROTH IRA as this was tax year 2022 when it occured. Does paying income tax on the excess contributions and earnings not satisfy the excess at that time thus making the amount distributed to the ROTH IRA no longer "excess" or does it continue to be?

Unfortunately I already contributed the standard IRA limit in the tax year as well. Still being considered excess after paying income on it seems like double taxation which, as I understand from reading IRS website seems to only apply to standard 401k (possibly because a standard 401k is an income defferal as opposed to a non-deductible ROTH). I read in an example that the ROTH 401K is only taxed at the time of distribution but I suppose that if it's considered a distribution at the time of rollover that still applies?

Thanks for the insights you are probably more knowledgeable than a random CPA I would consult in my area.