Can excess contribution to 401K which was rolled over to Roth IRA be left in the Roth? I made 26K(4K excess) after-tax contributions to 401K & rolled it over to Roth IRA.

[vishalkirti-n]

I made 26K after-tax contributions to my 401K (Fidelity) and rolled it over to Roth IRA at Vanguard. Fidelity later determined that 4K out of 26K was an excess contribution. I have received 2 1099-Rs from Fidelity, 4K for distribution with code E, 22K for distribution with code G. I can file taxes with these forms. My main question is that if I don't remove the 4K from Roth, would IRS know? Probably not. IRS has no way of knowing if all 26K went to Roth IRA or only 22K went to Roth IRA, correct? If IRS would not know, then there is no point in trying to remove this fund from Roth IRA. My inertia for removal comes from the fact that Vanguard is saying that if I take such a step, not only will I be paying taxes on any growth, I will also be paying a 10% early withdrawal penalty on that growth.

[dmertz]

The Roth IRA custodian must file Form 5498 showing $26k of rollover contributions.

If a distribution that is ineligible for rollover is rolled over, it constitutes a regular contribution despite how the IRA custodian reports it on Form 5498.  If you leave the money in the Roth IRA , you should report it on your tax return as $22k directly rolled over (the code G Form 1099-R) and $4k of regular Roth IRA contribution.  If that $4k is not an excess contribution, you are fine.  If it is an excess contribution, you can either obtain a return of contribution before the due date, including extensions, of the tax return for the year for which the contribution was made and pay tax and penalty on the gains, or you can leave the money in pay the 6% excess contribution penalty and obtain a regular distribution of the $4k, not including earnings, after the extended due date (October 15) but before the end of the year to avoid additional 6% penalties each year.  Given the substantial market gains over the past year, the latter approach might be the best.

[vishalkirti-n]

Thanks. I had forgotten about 5498 since it doesn't show up in my Vanguard account yet. I can see it for 2018 but not for 2019 yet. Since it will indeed be an excess contribution for me, I am just pulling it out. I will end up paying ~30% in taxes (on the growth) and ~10% in the penalty (on the growth), which is 40% of the 15% growth I see in the account. It is similar to 6% penalty.