Withdrawn retirement rolled into Roth IRA

[aburks1021]

I live in Texas and previously worked for the state. I contributed to the ERS retirement fund the entire time of my employment and when I left the agency, I withdrew my retirement and took some of the money and opened  two separate Roth IRAs for my wife and I. Should I be responsible for paying the 10% penalty for early distribution on the entire amount withdrawn or just the money that was not used to open the Roth IRA accounts? 

[Critter-3]

Oh my ... did you not ask this question before doing  this ???

First an IRA is an individual thing ... so you can take a distribution from YOUR retirement account and avoid penalties on the portion you rolled into YOUR ROTH IRA only.  It is still subject to federal and possibly state taxes of course. 

And if you don't have enough earned income to make ROTH contribution to either account then you have an excess unallowed contribution since you cannot roll your distribution into her account ... it is not allowed.  

[Opus 17 · Accepted solution]

Money in your qualified retirement plan belongs to you.  There is no legal way to put some of it in your wife's name via rollover.   

The money you withdrew from your account and deposited in your spouse's name is a distribution to you, subject to regular income tax plus a 10% penalty.  It is treated as a contribution to your wife's account (not a rollover).   Her contribution limit is $7000 if she is over age 50, but if your or her compensation from working is less than $7000, then that lower amount is her contribution limit.  Everything over the contribution limit is an illegal contribution and must be removed before the end of the year or it will be subject to additional penalties.

The money you withdrew from your account and deposited in a Roth IRA in your name might be considered a rollover.  You can do one rollover per year, as long as you told the Roth custodian it was a rollover and they processed it as such.  Rollovers must be completed within 60 days.  Because this is a conversion from a pre-tax plan to Roth IRA, you will owe income tax but not a penalty on the converted amount.

Any amounts that you kept are withdrawals subject to income tax plus the penalty, if you are under age 59-1/2.

If you just did this, you may be able to reverse everything within 60 days.  Pull the money out of both Roths as a mistaken contribution, and put all the money back in the ERS plan.  If you can do this within 60 days then it is as if it never happened.  Then you can get qualified advice before trying to move the money. 

[aburks1021]

Thank you for this thorough and detailed answer. 

I have one follow up question. If it was processed correctly as a rollover should I expect to receive Form 5498? 

[Opus 17]

Yes, you would receive a 5498 from the new Roth in your name with the rollover amount in box 2.

Regarding the Roth IRA you opened in your wife's name, if you don't withdraw the money and close it, they should also issue a 5498, either as a contribution or a rollover.  (If marked as a rollover because you told them so and they didn't verify it, that will trigger objections at the IRS since the IRS will know there are no plan assets in your wife's name that could be rolled over.)  

[Critter-3]

More important you will get a form 1099-R next January ... do not file without it.

[aburks1021]

Thank you @Opus 17 , you have been most helpful! I sincerely appreciate you. 

[tbrown21]

@aburks1021  If you are over 55 and you retired, there is no 10% penalty. Did you take the distribution as a partial lump sum option, if so you can rollover the entire amount within 60 days to your own Roth IRA, or you can fund (up to maximum depending on income, age, filing status) to your wife's Roth IRA, but you will add that amount to your income. (no penalty) The other posters that answered you question probable aren't familiar with the TX retirement plan.

[Opus 17]

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@tbrown21 wrote:

@aburks1021  If you are over 55 and you retired, there is no 10% penalty. Did you take the distribution as a partial lump sum option, if so you can rollover the entire amount within 60 days to your own Roth IRA, or you can fund (up to maximum depending on income, age, filing status) to your wife's Roth IRA, but you will add that amount to your income. (no penalty) The other posters that answered you question probable aren't familiar with the TX retirement plan.

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Any qualified retirement plan is subject to the same rules.  

The problems are that the original post described that the taxpayer (1) withdrew money from a qualified plan, (2) "rolled over" some money into a Roth IRA in his name, (3) "rolled over" some money into a spouse IRA, and (4) kept some money.  The taxpayer never said he was retired, and didn't give his age, just that he used to work for the state of Texas.  Because the taxpayer indicated that some of the transaction was subject to 10% penalty, I assume he is under age 55 or 59-1/2.  

#2 is a rollover with Roth conversion, that's simple.  He pays regular income tax but no penalty regardless of age.

#4 is a distribution, that's simple.  He pays income tax and the penalty if under age.

#3 is the problem.  He could take a distribution (subject to income tax plus the penalty) and then make a contribution of $6000 (or $7000 if his spouse is over age 50) but he can't "roll over" any part of his account into an account in her name.  And, he can only make the contribution if he or his spouse have taxable compensation from working.  If he "rolled over" more than $6000 or $7000 into the spouse account, that needs to come out of the Roth or it will be further penalized.  

Now regarding age, I don't think just being age 55 will qualify the distribution.  He has to be age 55 or older in the year he separated from service.  That is to say, suppose he worked for Texas from age 30 to age 40, and is now age 56.  The distribution is not qualified.