ROTH 401K to ROTH IRA rollover

[jaymax69]

I've seen a similar scenario but not my exact situation.

In 2022 I had a ROTH 401K account with TD Ameritrade.  I accidentally overcontributed to it...not by maximum contributions of 27000 (which I did) but turned out after payroll taxes at the EOY I wound up $3800 over.  I have a solo401k and contributed based on expected salary but fell short and didn't catch it on the W-2 (43000 earned, 27000 contributed but turned out 3800 over after calculating withholding and SS).

TD Ameritrade then told me they were discontinuing ROTH 401k accounts and I was forced to rollover to a ROTH IRA.  Only caught it this week when checking last year's contributions and making sure I did everything right. Regardless, the overcontribution and subsequent earnings still remains in the ROTH IRA today.

As a ROTH 401k what do I do?  does the excess become ineligible to rollover to the ROTH IRA and become taxable for the 2022 tax year of the rollover?  In addition to excise taxes of 6%?  If I withdrawl the funds now - which I intend to do.   Or do I pay income tax on the excess contributions and earnings from them and then deal with 6% excise tax (and possibly 10% early withdrawl penalty)?  I'm past the excess contribution distribution timeline.

[jaymax69]

I've read in the case of a ROTH 401k you pay income taxes on excess contributions and earnings in the year you make a distribution not the year it occurs - Im just not sure if this applies to the ROTH IRA rollover.  I don't believe the rollover constitutes a "distribution" in this case.   So presumably the distribution only occurs when I remove it from the ROTH IRA.  If I remove the excess plus all earnings as income tax in 2023 does that satisfy the excess contributions rules or must I still pay 6% excise tax for every year it remained in the ROTH IRA?

[dmertz]

A rollover from the Roth 401(k) to the Roth IRA is indeed a distribution from the Roth 401(k).  Because it's too late to obtain are return of the excess deferral, the deadline was April 15, 2023, the excess Roth 401(k) contribution and attributable earnings are, as you mentioned, taxable when distributed and are ineligible for rollover.

It's unlikely that TD Ameritrade will know anything about the excess contribution and be able to distribute the excess and attributable earnings to you as a taxable distribution instead of rolling them over unless you tell them about it.  Even if you tell them they might not be able to do so and you would have to submit substitute Forms 1099-R to properly report the distribution.  If the excess and attributable earnings end up the Roth IRA, they will need to be removed by a removal of excess contribution before the due date of the tax return, including extensions, for the year in which the deposit into the Roth IRA is made or treated as a regular Roth IRA contribution for the year in which the deposit is made.

[jaymax69]

1: So I must now ammend my 2022 return and pay regular income tax on the excess contributions and earnings at the time of rollover/distribution?  In this case would a 10% early withdrawl penalty still apply?

2:It's too late to remove the excess contributions/earnings to the ROTH IRA as this was tax year 2022 when it occured.  Does paying income tax on the excess contributions and earnings not satisfy the excess at that time thus making the amount distributed to the ROTH IRA no longer "excess" or does it continue to be?

Unfortunately I already contributed the standard IRA limit in the tax year as well.  Still being considered excess after paying income on it seems like double taxation which, as I understand from reading IRS website seems to only apply to standard 401k (possibly because a standard 401k is an income defferal as opposed to a non-deductible ROTH).  I read in an example that the ROTH 401K is only taxed at the time of distribution but I suppose that if it's considered a distribution at the time of rollover that still applies?

Thanks for the insights you are probably more knowledgeable than a random CPA I would consult in my area.

[jaymax69]

Please disregard my questions/comments about the double taxation thing.  I now understand it's due to it being an ineligible rollover for the excess contributions and earnings.

I still do wonder about the 10% however since, technically, the account was funded in 2022 and rolled over a few months later in the same year.  I doubt it applies to the eligible rollover amount but maybe for the excess and earnings?  So it's not actually a late withdrawl from the roth 401k but could be considered an early distribution and penalyzed as such that 10%?

Any thoughts guys?

[dmertz]

I missed the fact that the rollover to the Roth IRA occurred in 2022 and had assumed that the rollover to the Roth IRA occurred in 2023.  Since it occurred in 2022, if you were not eligible to treat the $3,800 as a regular Roth IRA contribution for 2022, you owe a 6% penalty on the $3,800 plus attributable earnings accrued in the Roth 401(k) for 2022.  If you were similarly not eligible to treat the excess as a regular contribution for 2023, you also owe another 6% penalty with your 2023 tax return.  Assuming that you also will not be able to treat the excess as a regular contribution for 2024, correcting the excess now requires a regular distribution equal to the amount of the excess.  There will be no early-distribution penalty because the distribution will be a nontaxable distribution of contribution basis.

[jaymax69]

1. Thanks for that I was aware of the 6% excise tax penalty per year.  Too bad it's not paid at the end but I have to amend the 2022 return anyway so no big deal.

2. The early withdraw I wasn't sure about was if the excess distribution from the ROTH 401K that was considered ineligible for rollover should incur a 10% early withdraw penalty on that end at the time of rollover for tax year 2022.

3. I have read somewhere not to amend the W-2.  However, the excess contribution is sitting right there for the IRS to see on my W2 record - which is of course how I caught it albeit late.  I feel like it's a red flag target on my back as long as it's there which is forever if I don't amend. I would like to amend the W2 once the funds are removed to indicate the excess contribution is gone and the W2 will reflect the proper amount that should have been withheld/contributed in the first place.  I know I indicate that on the roth distribution 1099 but this will never change the W2 and the last thing I need is an audit in 5 years over something I've already corrected.  Is this allowed or is there any other way to deal with it on my official tax record somehow?

[RobertB4444]

You can get a corrected W2 from the employer in order to correct the distribution but you have already corrected the excess distribution on your amended tax returns.  The IRS should be able to match these amounts if the computer ever flags the distribution on the original return.  Your tax record is already corrected.

@jaymax69 

[dmertz]

The W-2 is correct as is in that it shows what the employer actually deposited into the account and should not be modified.