Removing the mega back door funds that I contributed before the end of the year (December 2021)

[zz181]

I went ahead and contributed to my non-prototype after-tax account for the year 2022 even before the year ended in December 2021. I also went ahead and rolled-over the entire amount to to Roth also in December 2021. I know now that you cannot contribute to subsequent years and that I need to remove the excess. I have initiate the process for the removal from my custodian as it is a failed conversion. 

My questions:

1.  How many 1099-Rs should I expect and how will they be coded?

2. Do I need to file an amended tax return (1040x) this year to report the excess and the removal? if so, any guidance is appreciated.

Thanks.

[fanfare]

@zz181 

Excess earnings when removed are taxable in the tax year for which the excess contribution was made.

[zz181]

This is already taxed money. This was contributed into the after tax account. So no taxes are not due. My question is whether I need to submit a 1040x (Sec 301).  

[Critter-3]

"non-prototype after-tax account"  ???   Are you saying this was a Solo ROTH 401K ?   If so you rolled over a roth account to another  roth account and nothing is taxable.  You should get on 1099-R for the distribution probably code G but possibly code 1 or 7. 

[zz181]

Thanks for responding. 

Yes. this is a solo 401k. You are correct, I will receive a 1099-R but it will be coded E as I understand since this is a failed conversion.  But my question is do I have to amend my tax 2021 based on Sec 301?

Just to clarify, this was from an after-tax account (not a Roth) into a Roth. As I understand, this is a failed conversion so I need to remove the excess within a 6 month period which I am initiating. 

[Critter-3]

Let's ask @dmertz  for their 2 cents ...  

[dmertz · Accepted solution]

The distribution of these funds from the solo 401(k) will have code E (instead of code 1, 7 or G), indicating that the distribution was not eligible for rollover despite the funds having been rolled over to the Roth IRA.  This Form 1099-R should show the distribution as nontaxable unless there was a gain while in the solo 401(k), in which case the gains will be taxable.

If you filed your 2021 tax return or requested a filing extension by April 18, 2022, you have until October 15, 2022 to obtain a return of the excess Roth contribution.  The amount distributed will be adjusted for investment gain or loss.  Since the excess Roth contribution was made in 2021, the 2022 Form 1099-R will have codes J and P in box 7, the amount distributed in box 1 and, if there was an investment gain, the taxable gains in box 2a.  The amount in box 2a will be subject to ordinary income tax and, if you are under age 59½ at the time of the distribution, to a 10% early-distribution penalty.  This is all reportable on your 2021 tax return, not on your 2022 tax return.  Make sure that there you decline any tax withholding.

If you are late in filing your 2021 tax return (did not request a filing extension), on your 2021 tax return you'll owe a 6% penalty on the excess Roth IRA contribution and you'll need to make a regular distribution (code J, T or Q) of the excess, reportable on your 2022 tax return.

[zz181]

Thank you, dmertz. Very helpful and appreciate your detailed explanation. All valid points and confirms my understanding as well.

So I should expect two 1090-Rs? One with a Code E now in 2022 for the failed conversion and the other one in 2023 with Codes J and P? 

My understanding is that I need to file an extension 1040x and write  pursuant to "301.9100–2". This per IRS guidance apply to elections for which corrective action is taken on or after December 31. I have looked it up and it seems right. Any thoughts on this?

[dmertz · Accepted solution]

I would expect the code E Form 1099-R to be a 2021 Form 1099-R since it needs to reflect the distribution from the 401(k) that was originally intended to be a permissible rollover to the Roth IRA.  A code JP Form 1099-R will be a 2022 Form 1099-R that you'll receive near the end of January 2023, reportable on your 2021 tax return if there is any taxable gain.  To be able to file your 2021 tax return without amending later to add the code JP Form 1099-R you can enter the code JP 2022 Form 1099-R into 2021 TurboTax as if you have already received this form.

Section 301.9100–2 applies only if you already filed your 2021 tax return by April 18, 2022.  If you requested a filing extension by April 18, 2022 you'll just file your 2021 tax return as you normally would, factoring in the code JP 2022 Form 1099-R.  Section 301.9100–2 has to do with treating the corrective distribution as if you had requested a filing extension as long as you filed your 2021 tax return by April 18, 2022.  If you timely requested a filing extension, there is no need to invoke section 301.9100–2.

[zz181]

Thank you so much dmertz! You have been extremely helpful and very thorough.  Not even the most experienced CPAs have been able to help me with this.  

Unfortunately, I have already filed my 2021 taxes.  So I guess I need to invoke section 301 by October deadline.

Thanks again for this. I now know hat to do. 

[zz181]

dmertz, thank you for all your help. I managed to remove the excess contributions from the Roth. I have some follow-up questions.

1. I only received a letter from Fidelity indicating the excess contribution with a loss amount captured. So far so good. But the letter states that a 1099-R will be mailed to me next January (i.e.2023). Is that correct? 

2. Can you please let me know how to go about filing an amendment invoking section 301 as I had filed my tax returns before April 2022? My understanding is that it is very doable as a DIY exercise. 

3. Also, wouldn't I need the updated 1099-R for that? Right now, I have no record of 1099-R indicating that it was an over contribution. I have a third party that generates the 1099-R for me with regards to the roll over of the money from the after-tax to the Roth IRA. Should I be reaching out to them to generate a 1099-R for this excess contribution or does this fall under Fidelity since the Roth IRA is with them? 

Thank you.

[dmertz]

1. That's correct for the return of contribution from the Roth IRA.  The 401(k) plan might issue a corrected code G 2021 Form 1099-R with $0 in boxes 1 and 5, but if they don't, you can submit a substitute 2021 Form 1099-R (Form 4852) with your amendment.  I think you've indicated that Fidelity is not the trustee of the solo 401(k) plan, so it's not their responsibility.
2. Since there was a loss rather than a gain, the only reason to amend is to correct the reporting of the rollover to the Roth IRA indicate that there was no rollover.  You would do this by substituting the corrected code G Form 1099-R provided by the plan or by filing a substitute Form 1099-R (Form 4852) in place of the original code G Form 1099-R that originally reported this rollover.  There is no need to wait for the code JP 2022 Form 1099-R since that form only confirms that you received a return of contribution.  You explanation statement filed with the amendment will indicate There was a failed rollover, the amount returned (equal to the amount of the failed rollover) and the loss-adjusted amount  distributed.  Also, make sure to indicate "filed pursuant to section 301.9100–2" on the amended return.
3. Presumably you've already contacted your plan trustee to obtain the code E Form 1099-R, so I would expect them to also provide a corrected code G Form 1099-R, but if they don't provide that you can do the substitute as I indicated above.

General instructions for amending with TurboTax are here:

https://ttlc.intuit.com/turbotax-support/en-us/help-article/tax-return/amend-change-correct-return-a...

I would expect Column B of the Form 1040-X to have all zeros since there is no change to the $0 taxable amount originally reported for the rollover to the Roth IRA.

[zz181]

dmertz, I can't thank you enough for all this explanation.

Yes I have requested the 3rd party to issue the two 1099-R forms (coded E and G respectively) so I can amend my tax return.

But one question lingering though. Since there were no gains and I have already removed my excess contribution, doesn't this make it all even. In other words, since these were after tax monies, and I in fact have only lost (no gains) and therefore nothing owed in taxes, I am wondering what the purpose of even amending the 2021 taxes.  Isn't this technically money in and money out without any tax implications? Is it just to inform the IRS about the excess contribution and the subsequent failed rollover? Is that it or is there something more to as why one has to amend the taxes? I understand if I had any gains that I need to pay taxes on them and therefore would have to amend my taxes,  but in this instance it was a loss, and that is what I am wondering.

Again, you have been so helpful and this isn't easy to begin with. So appreciate your continued support.

[dmertz]

Right.  I suppose that you could instead not file the amendment and just provide explanation to the IRS if they ever ask about the transactions, but filing Form 1040-X would proactively indicate to the IRS that there is no change to your taxable income or tax liability, allow you to provide explanation of the return of contribution and indicate that it was done pursuant to section 301.9100-2 (that the return of contribution was timely).

[zz181]

dmertz, thanks again. All this has been super helpful to clear this mess for me. Much appreciated. All I can say is Wow!

Most importantly your patience and thoughtful responses in unwinding this whole complex mechanics have converted me into a Turbotax fan!

Thanks again.