Please help to determine my Roth IRA excess vs withdrawal for 2021. Can I roll it back to either of my IRA if I shouldn't withdraw it?

[FortuneCookies]

Hi there,

I believe I have made a big mistake. I have been struggling to determine whether the Roth IRA conversion should be deducted from MAGI. Last week I finally asked my IRA provider Fidelity to remove the 'excess' contribution from 2021.

Here is the timeline:

2021 Tax - AGI 170,000. This AGI included the 50,000 Roth IRA conversion. I made a 5k Roth IRA contribution for 2021.

2024 March - Requested Fidelity to remove 5k as '2021 excess'. They have deposited the 5k to my brokerage account.

I tried to amend my 2021 return via Turbotax desktop version to report as 'excess'. However, it does not flag for any 'penalty'.

Questions:

1. What was my MAGI in 2021? Was I eligible to make 5k Roth contribution that year?

2. If I did not make an excess, I really don't want to withdraw it. Am I able to put it back now? The withdrawal made was last week.

3. What are my options to reduce the damage if I can't put it back to my IRAs? Can I ask Fidelity to send a new update to IRS to change from '2021 excess' to '2024 distribution'?

4. What are the tax years I need to file amend to IRS? FYI, I haven't filed my 2023 tax because of this...

TIA.

FortuneCookies

[dmertz · Accepted solution]

Assuming no additions are required to your AGI to produce your MAGI for the purpose of a Roth IRA contribution and that your Roth "conversion" was not an In-plan Roth Rollover but instead resulted in a deposit into a Roth IRA as you have implied, your MAGI for this purpose is $170,000 - $50,000 = $120,000 which puts your 2021 MAGI below the threshold where your eligibility to make a Roth IRA contribution begins to phase out for all filing statuses but Married Filing Separately.  Based on these assumptions, it seems that you made no excess contribution for 2021.

The distribution that you received should have been an ordinary Roth IRA distribution (code J, T or Q only) because it's far too late to obtain a return of contribution before the due date of your 2021 tax return.  Because it has been less than 60 days since this regular distribution was made, you can roll over this distribution back into a Roth IRA as long as you have done any traditional IRA-to-traditional IRA or Roth IRA-to-Roth IRA rollovers in the one-year period ending on the day before you received this distribution that you would be rolling over.

The distribution and rollover would be reportable on your 2024 tax return, nothing about it or any excess contribution on your 2021, 2022 or 2023 tax returns.

[FortuneCookies]

Hi @dmertz ,

Sorry more follow-up questions:

1. The Roth conversion was made from my Rollover IRA (funded from previous 401k) to Roth IRA. It means this is the type of 'deposit into a Roth IRA', right?

2. No I did not have any rollover activity in the past year. I called Fidelity on Sunday if they could reverse the transaction or roll the money back from my brokerage account to Roth in case I have confirmed it wasn't an excess. They said they couldn't.  Does the rollover rule have to be like to like account transfer within 60 days? What's the better approach to tell Fidelity about the rollover request?

[dmertz]

1.  Yes, the taxable amount of such a conversion is subtracted from AGI when determining the MAGI for the purpose of a Roth IRA contribution.

2.  Fidelity can't undo the distribution, but since this was a regular distribution that actually was not a distribution of any excess, the distribution is eligible for rollover within 60 days (since it would not be a violation of the one-rollover-per-12-months limitation).

Just make sure that they did a regular distribution and did not  somehow do a return of any 2023 contribution you might have made (which would allow you to treat an excess as part of your 2023 Roth IRA contribution).  A return of a portion of your 2023 Roth IRA contribution would not be permitted to be put back, although, with that amount of a 2023 contribution having been undone, you would still have room to contribute to a Roth IRA for 2023.

[FortuneCookies]

Hi@dmertz 

1. Thanks for for confirming.

2. I haven't made the 2023 contribution.  With you statement above, is it better to make the 2023 contribution now and wait after the April deadline (close for 2023 contribution) to request the rollover.

3. If I move on to forget about the rollover, I will need to pay the 10% penalty next year. In the initial withdraw, Was Fidelity required to specify my reason of withdrawal? Do I need to ask them to send an update to IRS to change as regular distribution? The reason I ask because I don't want IRS has it on file that I have a missing 1040X and then cause an audit.

[dmertz]

2.  No reason to delay the rollover.

3.  There is no early-distribution penalty because the distribution from the Roth IRA (assuming that it was done properly, which seems to be the case) is already a regular nontaxable distribution of contribution basis.  A distribution of any part of the  2021 contribution after the due date of the 2021 tax return can only be a regular distribution.

[FortuneCookies]

@dmertz 

I just spoke to Fidelity. I have called in twice for the rollover question. Again, they said the 60days rule can't apply in my case it was coded as 'nontaxable' distribution. I can't roll it over back to any of the IRAs (Traditional or Roth) or to different institution. Can you help me understand this?

I guess I will give up to leave it alone. When I receive the 1099-R next year, I won't be taxed for this distribution, right?

[dmertz · Accepted solution]

A distribution made in 2024 to correct a 2021 excess contribution must be a regular distribution, so coding it as a nontaxable distribution would seem to be an error made by Fidelity.  This brings into question the type of distribution they think they made.  If they actually did do a regular distribution as required under these circumstances and somehow coded it internally a nontaxable distribution, how they coded it internally is irrelevant and does not change the fact that it was a regular distribution that was eligible for rollover.

Perhaps you need to ask them to correct their incorrect coding.  You need to make sure that they do not code the 2024 Form 1099-R with codes P and J or codes 8 and J which imply that they processed the distribution incorrectly.  If they do issue a 2024 Form 1099-R with codes P and J or codes 8 and J, and refuse to correct it, you could file a substitute Form 1099-R (Form 4852) explaining that the distribution constituted a regular distribution, not a return of contribution before the due date of the 2021 tax return.

Because the distribution constitutes a regular distribution, the distribution is eligible for rollover no matter what Fidelity says.  You should be able to deposit it into a Fidelity Roth IRA as a rollover no matter what Fidelity says about this particular distribution's eligibility for rollover by simply completing Fidelity's deposit slip (marking the deposit type as being a 60-day rollover) and sending it to them with a check.  Fidelity doesn't really have any say in whether or not a particular deposit is a permissible rollover, particularly because the deposit slip does not ask you where the distribution came from. For all they know, the money could be coming from a Roth IRA that you have at a different custodian.  It's your responsibility to determine whether or not a particular deposit qualifies as a rollover and Fidelity's responsibility to follow your instructions (unless it would be a clear violation such as making more than the permissible amount of regular Roth IRA contributions for a particular year).  If somehow Fidelity won't accept the rollover, you could deposit it into a Roth IRA at a different custodian as a rollover.

[FortuneCookies]

Hi @dmertz ,

Today I asked Fidelity to provide me the specific code that was reported on 1099-R and the eligibility for the rollover.

When he returned, he told me that it was filing as "code 1 - early distribution". and this fund was eligible to rolling back to my Roth IRA.

Please can you let me know if the filing code they have provided is correct? I need to make sure I am not getting into a trouble when making 2023 contribution by April 15.

TIA.

[dmertz]

Yes, that's the correct code.  It appears that you finally got an accurate response to your question, indicating that this distribution is eligible for rollover.  The deadline to complete the rollover is the 60th day following the date of the distribution.

To avoid any confusion, I would send the funds and deposit slip for the rollover separately from those for any contribution for 2023 that you make.

[FortuneCookies]

Hi@dmertz ,

I am still working on my 2023 tax and be very cautious to verify my eligibility for 2023 contribution. I will make contribution online if I am eligible. For the rollover request, I can deposit a check. Can you please suggest a better phrase to describe the rollover when writing on check/deposit slip?

TIA.

[dmertz]

Fidelity's Deposit Slip has a box to mark to indicate that the Deposit Type is "60-day rollover."

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/deposit-slip.pdf

[FortuneCookies]

@dmertz 

Thanks for the link of the deposit slip. I am going through the IRA section now.  Since you are fully aware of my situation, I want to ask this question now:

After I request the 5k rollover back to my Roth,  what should I answer this question in my 2024 return:

"Is This a Repayment of a Retirement Distribution?"

[dmertz]

This is not a regular Roth IRA contribution.  Nothing about this is to be entered under Deductions and Credits, so you will not be presented with this question in regard to the rollover.  The rollover is to be indicated only during the entry of the code-J 2024 Form 1099-R.

The question about repayment pertains only to military reservists who were called to active duty and took money out of their retirement plan.

[FortuneCookies]

@dmertz 

Thanks.

One thing I have noticed that even I have the Premier version, TurboTax don't not calculate my phase out eligibility amount. I believe I can only contribute 5k for 2023. I was intentionally entered 7k as my Roth contribution and Turbo Tax was still letting me pass to next screens and asked if I want it to track my basis.

The expectation is TurboTax can do it for us since it has my income and personal info already.