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Retirement tax questions
@dmertz wrote:Upon rollover to a Roth IRA, basis in regular contributions to the Roth 401(k) becomes contribution basis in the Roth IRA and basis in IRRs becomes Roth conversion basis in the Roth IRA. Earnings remain earnings.
This is getting a bit dizzy. Previously, it was said that there were only contributions to a Roth 401K, and everything else was earnings. It looks more nuanced than that, so we have contributions, rollovers, and earnings. Is that correct?
The differentiation matters because it affects how the money is withdrawn from the Roth IRA after the Roth 401K rollover is executed. The rules are basically: bucket-1) contributions, then bucket-2) conversions/rollovers (taxable and then non-taxable), and then bucket-3) earnings.
My question is whether my IRR to Roth 401K is considered part of bucket-1 when the rollover to Roth IRA happens, or is it considered part of bucket-2? I think it should be part of bucket-1. Let me provide the evidence that I gather:
I found the following Q & A in the Treasury Decision 9324 (https://www.irs.gov/irb/2007-22_IRB#TD-9324:(
Q-3. For purposes of the ordering rules on distributions from Roth IRAs, what portion of a distribution from a rollover contribution from a designated Roth account is treated as contributions?
A-3. (a) Under section 408A(d)(4), distributions from Roth IRAs are deemed to consist first of regular contributions, then of conversion contributions, and finally, of earnings. For purposes of section 408A(d)(4), the amount of a rollover contribution that is treated as a regular contribution is the portion of the distribution that is treated as investment in the contract under A-6 of §1.402A-1, and the remainder of the rollover contribution is treated as earnings. Thus, the entire amount of any qualified distribution from a designated Roth account that is rolled over into a Roth IRA is treated as a regular contribution to the Roth IRA. Accordingly, a subsequent distribution from the Roth IRA in the amount of that rollover contribution is not includible in gross income under the rules of A-8 of §1.408A-6.
They confirm what you said about the treatment of the rollover contribution money. But there is still a nagging thought in my mind, which is that the contributions to my Roth 401K are solely coming from IRRs, which are reported in my 1099-R as:
- box 5: Employee contrib/desig Roth contrib or insurance premiums
- box 7: G (Direct rollover of a distribution to a qualified plan, a section 403B plan, a governmental section 457(b) plan, or an IRA)
So, my Roth 401K has no "direct contributions." It only has IRRs and earnings. I then looked closer at the text: "That is treated as investment in the contract under A-6 of §1.402A-1". I went to the definition of A-6 of §1.402A-1 (https://www.law.cornell.edu/cfr/text/26/1.402A-1) which states the following:
A-6. (a) If a distribution from a designated Roth account is rolled over to another designated Roth account in a direct rollover, the amount of the rollover contribution allocated to investment in the contract in the recipient designated Roth account is the amount that would not have been includible in gross income (determined without regard to section 402(e)(4)) if the distribution had not been rolled over. Thus, if an amount that is a qualified distribution is rolled over, the entire amount of the rollover contribution is allocated to investment in the contract.
They talked about rolling over a designated Roth account to another designated Roth account, which I found weird because the Treasury Decision was talking about rollovers to a Roth IRA. One thing that caught my attention was the following "the amount of the rollover contribution allocated to investment in the contract in the recipient designated Roth account is the amount that would not have been includible in gross income (determined without regard to section 402(e)(4)) if the distribution had not been rolled over. "
I then looked up what Box 5 means (https://www.irs.gov/instructions/i1099r please also append this to the end of the URL#en_US_2024_publink[phone number removed])in my 1099-R, and I found the following:
Enter the employee's contributions, designated Roth account contributions, or insurance premiums that the employee may recover tax free this year (even if they exceed the box 1 amount). The entry in box 5 may include any of the following: (a) designated Roth account contributions or contributions actually made on behalf of the employee over the years under the plan that were required to be included in the income of the employee when contributed (after-tax contributions), (b) contributions made by the employer but considered to have been contributed by the employee under section 72(f), (c) the accumulated cost of premiums paid for life insurance protection taxable to the employee in previous years and in the current year under Regulations section 1.72-16 (cost of current life insurance protection) (only if the life insurance contract itself is distributed), and (d) premiums paid on commercial annuities. Do not include any DVECs, any elective deferrals, or any contribution to a retirement plan that was not an after-tax contribution.
Given that language, the IRRs that I have in Roth 401K are considered contributions, and as such, when the Roth 401K rollover happens, my Roth 401K IRRs will roll over as contributions, too.
Curious to hear your thoughts @dmertz.
