Wrong request for excess contribution removal

[mpapadop]

Hello, I recently made wrongly a request for excess contribution removal from my Roth IRA account.

I got confused about the Roth IRA and Roth 401k contribution limits, since I thought they share the same max limit of $6000 (in 2022).

In 2022 I contributed the max $6000 in my Roth IRA and I also contributed $1900 in my employer's Roth 401k. So I thought I overcontributed in 2022 in my employer's Roth 401k the amount of $1900 and made a request to Vanguard to remove this excess contribution from my Roth IRA. But apparently I was wrong since they share different max limits.

I called them today to cancel this request and they told me that the cannot cancel this requet and on January 2026 I will receive a 1099-R for this and a check with the excess amout distributed. So I'm going to receive a 1099-R for an overcontribution that I never made.

Here's my questions:

a. Should I ignore this 1099-R and never import it in my taxes next year? I understand that I have to pay a penalty of 6% for each year (2022, 2023, 2024 and 2025) of this $1900 amount if I enter it in my tax return for something I never did.

b. What is the way I should treat this mistake?

c. They money that I wil lreceive back can be contributed again in my Roth IRA 2022 plan?

[dmertz]

Because the Roth IRA contribution was a contribution for 2022, the only type of distribution that was permitted to be made from your Roth IRA with respect to this distribution is an ordinary distribution which would be eligible for rollover should you choose to do so (assuming that it would not result in a violation of the one-rollover-per-12-months limitation).  However, it's also possible that Vanguard has processed a return of contribution before the due date of the corresponding tax return, which would only be permissible if what they were returning was a separate Roth IRA contribution made for 2024 or 2025, in which case the distribution would not be eligible for rollover (but would leave open the possibility to make a new contribution for that year).  Vanguard reps have been known to confuse returns of contributions after the due date of a tax return with returns of contributions before the due date of the tax return.

To be sure what sort of distribution you received, you'll need to ask Vanguard.

There should be no delay in you receiving the check.  Only the issuance of the Form 1099-R is delayed until January 2026.

[mpapadop]

So assuming that this amount wont be contributed again since I already max out contribution for the current year... for this $1900 I will have to pay 6% penalty for the 2022, 2023, 2024 and 2025 because I request a contribution removal?

Is there something I can do, not paying any penaly or tax since in reality I never overcontributed since the Roth IRA and Roth 401k are different accounts sharing different limits?

[dmertz]

There would be no tax or penalty on an ordinary distribution from your Roth IRA because it would be a distribution of contribution basis reportable on Part III of Form 8606.

If Vanguard instead mistakenly processed a return of $1,900 of your 2024 Roth IRA contribution (which would not surprise me), any attributable gains accompanying the $1,900 would be taxable but not subject to penalty.

[mpapadop]

So you're saying that the distribution of $1900 from my Roth IRA should be an ordinary distribution and there should be no tax since those are after tax money that I have already contributed to my Roth IRA.

However since I've requested Vanguard to handle those money as an "excess contribution" for 2022, and considering that Vanguard wont make any mistake, I'm expecting an 1099-R with distribution code 1 (early distribution) or code 7 (normal distribution) and J (early distribution from Roth IRA).

According to IRS, if those $1900 are considered excess contributions in 2022, because they have earnings from 2022-2024, and because it goes beyond of 2024, according to IRS, I dont have to take out those earnings anymore (since the excess goes back  beyond 2024) but instead I have to pay a penalty of 6% for the excess amount for each year the excess emaing in my Roth IRA ie from 2022-2024.

And indeed from what I see Vanguard only removed the $1900 from my Roth IRA without any earnings, which means that I have to pay this 6% penatly of this "excess" for each year from 2022-2024. But like I said this is NOT finally an excess contribution since I never exceeded the limit of $6000 for 2022, since I got confused with the Roth 401k and Roth IRA limits.

So my question is next year when received the 1099-R, how can I handle this to avoid any taxes or penalties of this $1900 amount from 2022?

[dmertz]

If there was no excess contribution, no excess contribution penalties are/were owed.

The code-J distribution is just an ordinary Roth IRA distribution of $1,900 reportable on Form 8606 Part III where it will be determined to be nontaxable.

[mpapadop]

Hello, thanks for claryfying this.

I just spoke with Vanguard asking for a indirect rollover of this distribution in 2025 year since I am within the 60-day window and made this distribtuion by mistake and they told since the money were removed from my Roth IRA account and went into my brokerage account with the same amount of shares ($1900 of VTSAX shares were moved from Roth IRA to my brokerage account ) , they can't do this  and to talk with an tax agent.

I have checked online in different resources, I see that I'm eligible for indirect rollover, when I receive the distribution as a check (or direct deposit) from the original Roth IRA and then deposit the funds into a new Roth IRA within 60 days. Since the shares were just moved from my Roth to brokerage account that means that I'm not eligible?

Is there any way that I can do this rollover since I'm still within the 60-day window?

[dmertz]

The same property must be rolled over.  If the shares were distributed in-kind, you are permitted to roll over those exact same shares into a Roth IRA.  What you are not permitted to do is have shares distributed in-kind, sell the shares outside of the Roth IRA, then roll over the cash or purchase some other shares and roll them over.

If the distribution from the Roth IRA was made in cash, your rollover must be doe with cash.

The rollover does not have to be back to the same Roth IRA, it can be to another Roth IRA, even at a different IRA custodian.

[mpapadop]

What Vanguard did after my request for excess contribution removal, is to distribute the money into my brokerage account and they did 2 transactions.

One worth $901.80 moving 1.6380 shares of VFIAX and another of $1000.01 moving 7.3671 shares of VTSAX.

I did see those distributions in my brokerage account.

Since the beginning of March that the stock market went down, the value of the same amount of shares reduced significantly.

So what you're saying is that a rollover should include the same dollar amount of the same share name ie $901.80 of VFIAX and $1000.01 of VTSAX (that means rollover more shares  from my brokearge acccount to the Roth IRA since the market went down and same dollar amount means more shares) or to rollover less money but same amount of shares distributed?

[dmertz]

"So what you're saying is that a rollover should include the same dollar amount of the same share name ie $901.80 of VFIAX and $1000.01 of VTSAX (that means rollover more shares  from my brokearge acccount to the Roth IRA since the market went down and same dollar amount means more shares) or to rollover less money but same amount of shares distributed?"

The latter.

https://www.irs.gov/publications/p590a#en_US_2024_publink1000230595

What I said was that the exact same shares that were distributed must be rolled over.  That means moving the 1.6380 shares of VFIAX and the 7.3671 of VTSAX back to the Roth IRA.  The fact that the share value has changed is irrelevant to rolling over the exact same property that was distributed, despite the fact that the Form 5498 will show a different value rolled over than the value distributed.  You'll still report it as a  rollover of the entire distribution which was valued at $1,901.81 at the time of the distribution.  Vanguard should be tracking these two share lots, so there should be no problem with this rollover.

I suggest that if in the future you ever need to do a return of contribution that you do it in cash by selling shares inside the IRA to have the cash in the IRA necessary to perform the distribution.  This also avoids any confusion as to whether there was one distribution or two, avoiding the complication that you are limited to rolling over one distribution in a one-year period.  In this case it appears that there was effectively a single distribution comprising amounts form two different funds allowing the entire amount to be rolled over, but this could look to the IRS as thought there were two distributions if as is typical for Vanguard that the two different funds are reported on separate Forms 1099-R filed with the IRS.

[mpapadop]

Thank you for clarifying. Your help is really very much appreciated!

Vanguard says that since the distribution from my Roth to my brokerage account was in shares instead of cash or check, they can only serve this rollover only as a dollar amount and not by moving number of shares.

That means that I will receive back the same amount that was distributed ie $1901.81 but I will receive more shares since the stock market went down since the last month.

However what they also told me is that they dont report number of shares in the IRS. For the distribution I did I will recieve a 1099-R which shows only dollar amount distributed, and in 5498 that it will be generated for 2025 it will also show dollar amount ie the amount I contributed $7000 and the amount of rollover $1901.80, they dont report shares in IRS. It is like I was doing this rollover in cash instead of moving shares.. So they dont expect to have any issue with the IRS.

Based on what you mentioned and justified with the link from the IRS, if I have to pay taxes on this rollover, that will be taxes only in the difference ie if the same amount of shares distributed the day of the rollover have avalue of $1700 then I will have to pay taxes on the $201.81 or for the entire amount?

[dmertz]

"Vanguard says that since the distribution from my Roth to my brokerage account was in shares instead of cash or check, they can only serve this rollover only as a dollar amount and not by moving number of shares."

Well, that may be a limitation they choose to impose, but that's not a limitation required by the tax code.

As I said, the tax code explicitly prohibits to completing a rollover by substituting cash for the shares distributed in-kind.  Doing so violates the same-property rule.  Of course the IRS is not likely to catch such a violation without an audit, but it would still be a failed rollover and the cash deposit would actually be an ordinary Roth IRA contribution.

An actual permissible rollover is not taxable, even if done in-kind and the shares have dropped in value.  You report the amount of the distribution that was rolled over based on the value of the property on the date of the distribution, not the value of the property on the date that the property was rolled over.  In this case you would be reporting a rollover of $1,901.81 of distributed value (the entire value distributed).