@Kell266108 wrote:
A rollover is when you remove from one retirement account to the Roth in a short period correct? If so, I did not take money from the 401k and move it to a Roth directly or in a short period at all. I put money into the Roth directly from my paycheck just this last year. Maybe I am still not fully understanding, but if it is eligible I would think the amount I repaid should be taken from taxable income? Unless you must repay to the same type of account that you removed from. In that case, because I repaid to a different type of retirement account it would not count as repayment. If that were the case at least.
Terms:
A rollover is when you move money from one qualified retirement account to another. It can be a direct rollover (electronically between the plan trustees) or indirect (you get a check from plan A and must deposit it into plan B yourself).
A conversion is a special type of rollover where you move money from a pre-tax account (like a 401k or traditional IRA) to an after-tax account, like a Roth IRA. Conversions are always taxable, because you are moving money that was never taxed, into an account that can only hold money that was taxed. So you pay tax on the conversion.
Rollovers and conversions are not contributions. Rollovers and conversions have no dollar limit. Contributions are new money going into an account and have dollar limits based on the kind of account, your age, your filing status, and other facts. Contributions do not count as rollovers.
An IRA is not a qualified workplace plan like a 401k or 403b. They are controlled by different parts of the tax law and have different rules, even though they are the same thing. If you are making payroll contributions, that might be to a designated Roth account that is part of a 401k, but it is probably not going to an IRA. An IRA would be a private account you set up with a bank or broker of your choice, and usually does not go through payroll.
Paying back your retirement account by making new contributions is not a rollover and does not count as "rolling over" your COVID distribution.
Let's review what you did.
1. You took a COVID distribution from your pre-tax 401k account.
2. If you wanted to repay it using the special rollover rules, that means taking after-tax money out of your bank account and sending it to the plan trustee using the special rollover rules. You have to send them a check or tell them it is a rollover when you make the electronic transfer.
2a. If you rolled the money over into a pre-tax account (either the pre-tax 401k or a traditional pre-tax private IRA) then you can amend your 2020 tax return to report the rollover and claim a partial refund of the tax you paid.
2b. If you paid the money into a designated Roth 401k account or a private Roth IRA, that would be considered a rollover as well, but it is also treated as a conversion, which means you have to pay the tax on the money. Since you already paid the tax, there is no new tax, but there is no tax deduction either. The advantage is that when you retire, withdrawals from the designated Roth account will be tax-free.
3. However, if you made new contributions to your 401k, that does not count as a rollover and does not adjust the COVID distribution. New contributions go in under the new contribution rules. If you contributed to a pre-tax 401k, your taxable salary is reduced (and you pay income tax when you withdraw the funds), and if you contribute to a designated Roth account, that does not reduce your taxable income now, but when you retire you can withdraw the money tax-free.
Either way, to be treated as a "rollover" of the COVID distribution, you have to take money out of your bank account and send it to the plan under the rollover rules. Rollovers and contributions are completely separate things, and if you made contributions, that's good for the future, but it doesn't result in any adjustment of the prior distribution.
