Excess contribution to 401k after-tax that got converted to Roth-IRA. How to fix/reverse/report?

[Pantelis]

Hello all experts and happy new year.

After an intra-company move to a different business entity (so same 401k plan) I ended up with about 10k worth of excess 401k after-tax contributions. Regular 401k was fine and stopped at the right limit.

In December, I took all my 401k after-tax contributions and converted them to a roth-IRA, as I usually do.

End of the year company saw the error, tried to pull back from 401k after-tax but it was already moved.

So now they say Roth-IRA company will have to update my 1099 or send me two of those or something like that. I'm asking clarifying questions but in the meantime, I'd like to see what experts here think.

How do I resolve this?
Can I actually draw 10k out of Roth under some non-penalty non-taxable situation? And can this be directly from the roth account? or do I need to have them move 10k  back to 401k after-tax and draw from there?
Or, do I leave it there (in Roth), pay some tax penalty(how much?) and contribute less next year?
Or anything else?

Lastly, will Turbo-tax premium online be able to handle this? I've been using this for the past 10+ years and I'd prefer not to switch to agent just for that if I don't have to.

Thank you and appreciate any help as I'm trying to detangle this.

[tagteam]

@dmertz 

[dmertz · Accepted solution]

"So now they say Roth-IRA company will have to update my 1099 or send me two of those or something like that."

It's the 401(k) that will be issuing Forms 1099-R.  They should treat as a corrective distribution the $10k excess and attributable earnings that was part of the rollover to the Roth IRA and report as rolled over only the part of the 401(k) that was no excess.  If the attributable earnings represented a gain, that gain will be taxable.

The $10k and attributable earnings was not eligible for rollover to the Roth IRA, so that must be treated as a regular contribution to the Roth IRA, an excess contribution to the extent that it exceeds the amount that you were eligible to contribute for the year.  You need to inform the Roth IRA custodian that the $10k plus attributable earnings must be treated as a regular contribution so that the Form 5498 for this account is accurate and request an explicit return of contribution to avoid excess contribution penalties each year until the excess is resolved.

You do have the option to leave the excess contribution in the Roth IRA, pay the 6% penalty, then apply the excess to the following year's Roth IRA contribution each year until the entire excess is resolved, but unless you have large investment gains in the Roth IRA since the rollover, which seems unlikely in today's environment, you would probably be better off obtaining the return of contribution.  The deadline for obtaining a return of contribution is the due date of your tax return, including extensions.

[Pantelis]

Thank you @dmertz , this is very helpful.

So what I have gathered so far is 401k will send me a 1099R-code g, and a 1099R-code e (I think). 
I'm also asking Roth-IRA for the return of funds too, so they'll probably send me another 1099R, unsure about the code. Do you know if 5498 for Roth-IRA will include the excess amount too or it shouldn't? I'm not allowed to contribute to Roth-IRA so my 5498 all it usually has is the rollovers.

Also, how do I make sure that both of these distributions (from 401k and Roth-IRA ) are not-taxed, given they were both sourced from 401k after-tax account? 
Will turbo-tax online be able to handle these cases? or would I need to go to a CPA?

thanks again.

[dmertz]

The Forms 1099-R should show the correct taxable amount of each of these distributions.  If there were no investment gains, the taxable amount should be zero.

The return of contribution from the Roth IRA would be reported on a 2023 Form 1099-R with codes J and P that must be reported on your 2022 tax return if there are any attributable gains that must accompany the return of contribution.  SECURE 2.0 has made any attributable taxable gains free of an early-distribution penalty, so if this Form 1099-R shows gains, you'll need to claim on your 2022 Form 5329 a code-12 (Other reason) exception to the early-distribution penalty that would otherwise be applied to the gains.

TurboTax can handle these transactions, but if Form 5329 is required you won't be able to used the Free version.