Roth 401k with Employer Contributions - When taxed?

[ESmithCA]

I rolled over my Vanguard Roth 401k into a Schwab Roth IRA in August 2024. Vanguard’s Disbursement Confirmation Letter clearly distinguished my post-tax employee contributions as non-taxable, and my employer’s pre-tax contributions as being taxable as ordinary income.

My question is: When is the employer contribution taxed? Upon rollover into a different Roth account (2024 taxes) or when it is ultimately withdrawn many years from now?

The 1099-R that I received from Vanguard shows the full amount as Gross Distributions and declares there is no amount taxable. When I asked Schwab, they said the employer’s contributions were in effect converted upon the rollover and were taxable now, while Vanguard states a roll-over is a roll-over and there was no taxable event. There is very little information online, and it is somewhat contradictory.

[jtax]

I don't have the detailed knowledge on designated Roths and 401ks to give you a definitive answer, but this reference might help you get a little further.

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Warning the book is aimed at lawyers and very technical and dense. But it might get you a little further. You might be able to ask the author or the e-book support for a referral. That might be the best way to get a definitive answer unless you get a better post here.

[ESmithCA]

To hopefully help others with this issue in the future, here is a summary of everything and what I did to (hopefully) resolve my problem:

- In 2024 I rolled over my Vanguard Roth 401k into a long-established Schwab Roth IRA.

- The contents of the ROTH 401k included both my post-tax contributions as well as my employer’s pre-tax contributions (as allowed per the 2022 SECURE Act 2.0).

- Vanguard’s Disbursement Confirmation Letter for the rollover distinguished my post-tax employee contributions as non-taxable, and my employer’s pre-tax contributions as being taxable as ordinary income.

- However, the 1099-R that I received from Vanguard showed the full amount as Gross Distributions but declared there was no amount taxable. The 1099-R only provided a Distribution Code of "H" (Direct rollover of a designated Roth account distribution to a Roth IRA) and showed the correct amount for my employee contributions but noted "$0" in the "Taxable Amount" box.

- After requesting a revised 1099R, an internal review at Vanguard declined to either modify the 1099-R or to split it into two 1099Rs with different distribution codes.

- A Schwab representative suggested using their Recharacterization Form to ask Schwab to recharacterize and move the pre-tax amount into my regular Schwab IRA.

- Their response to my request was that due to the Tax Cuts & Jobs Act of 2017 they were not allowed to recharacterize anything in a rollover nor treat any part of it as a conversion - and that I had to shift the pre-tax funds into my margin account as an excess contribution by the April 15 deadline for the 2024 tax year.

- In a later call to Schwab, a different representative said that I could use their “Certification for Late Rollover Contributions” form to justify a subsequent move of the funds from my Schwab Margin Account into my Schwab IRA (Where I believe it should have been deposited during the rollover process).

- The form allowed a “self-certification” of the reason for missing the usual 60-day rollover deadline (“An error was committed by the financial institution making the distribution or receiving the contribution”).

- It will ultimately be up to the IRS to allow or deny this self-certified correction to my rollover – most likely in response to the statements from Schwab that declare these movements of funds for my 2025 taxes (a statement of the funds leaving the ROTH IRA, plus a statement of the funds entering my regular IRA).

- In hindsight, I might have less anxiety over the IRS accepting my certification to correct this issue if I had moved the employer-contributed funds out of my ROTH IRA and then into my regular IRA within the normal 60-day window after the rollover distribution.

[dmertz]

If your employer made the employer contribution to the designated Roth account in your 401(k), the employer is required to issue to you a Form 1099-R reporting the amount as taxable to you.  If that employer contribution was deposited in 2024, you should have already received a code-G From 1099-R reporting in boxes 1 and 2a the amount of the employer contribution.  (If that deposit was made in 2025, I believe that it will be on a 2025 Form 1099-R instead, but since the rollover of these funds to the Roth IRA happened in 2024, the deposit had to have been made in 2024 and you should have already received the code-G 2024 Form 1099-R.)

The procedure that the employer is to follow is to treat it as deposit to the traditional 401(k) account followed immediately by an In-plan Roth Rollover but without regard to any other funds you have in your traditional 401(k).

In this case, I imagine that that the code-G Form 1099-R would be issued by Vanguard on behalf of your employer.

This is all entirely independent of the subsequent nontaxable rollover to the Roth IRA that was reported on the code-H Form 1099-R.

[ESmithCA]

I switched my 401k contributions to ROTH 401k contributions starting on mid-2020, and I'll have to presume that's when my employer started making their contributions to the ROTH 401k as well.

I never received a 1099-R from them over the 5 years before my rollover - and during the above described rollover to a ROTH IRA, I requested a 1099-R from Vanguard for the pre-taxable employer contributed amount, and they refused. That left me with no other option than to pull the employer contributed amount from the ROTH IRA, and deposit the funds into my regular IRA with the self-certification that this is where they should have been deposited in the rollover process since there was no other way to declare them as deferred-taxable retirement funds from my employer.

[dmertz]

Employer Roth 401(k) contributions were not permitted before 2024, so any employer contributions made for years prior to 2024 were required to be made to the traditional 401(k) account.  If you did not explicitly request that the employer contribution for 2024 be made to the Roth account, it too would have been made to the traditional 401(k) account.  Did you move only the Roth 401(k) account and left your traditional 401(k) account in place?  That would explain receiving only a code-H From 1099-R.  If the traditional 401(k) account was moved, you would have received a code-G From 1099-R.  Or perhaps you did move the traditional 401(k) account and you also received a code-G Form 1099-R that you haven't mentioned.

[ESmithCA]

Thanks, I did also rollover my traditional 401k to my IRA, and Vanguard did provide a separate, specific 1099R (Code G) for that rollover. Also, I looked it up, and the SECURE Act of Dec 2022 enabled employers to start contributing to ROTH 401ks in 2023.

[dmertz]

Yes, I misspoke regarding the effective date.  However, the IRS did not issue its guidance until early 2024, so few plans implemented Roth employer contributions after the effective date prior to 2024.  If you did not explicitly elect that employer contributions were to be made as Roth contributions, they were made as contributions to the traditional 401(k) account.