Rollover to Roth IRA from Teacher’s Retirement System Excess Contribution Refund
Hi. Client has rollover opportunity from Teacher’s Retirement System Excess Contribution Refund (money has not been taxed), and wants to roll it to his Roth IRA. TRS has option for Roth IRA rollover. They won’t withhold tax, and will generate a 1099. Receiving company asked us to type a LOI to them stating client is aware of tax liability, and to ask them to code as a Rollover so they can generate a 5498. I asked TRS what code they will use on 1099? They didn’t know. Do you think this will be coded as some type of rollover into a Roth IRA, so the client will have the tax liability, but no penalty?
Permalink Submitted by David Mertz on Thu, 2016-12-08 18:53
Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains are not eligible for rollover.
Permalink Submitted by Alan - IRA critic on Fri, 2016-12-09 01:38
As DMx indicated, the TRS should know that this is not rollover eligible and therefore no issue a direct rollover check. They will instead distribute the excess and applicable earnings to the client personally and code the 1099R with the applicable distribution code. They have to know what code will be applied, so client should ask to speak to someone else there that can confirm this.
Permalink Submitted by Peter Thomann on Fri, 2016-12-09 04:13
I think the op is talking about a governmental DB plan. It may be that the client contributed additional money into the DB plan that was not required. Many state and local DB plans permit employees to contribute additional money above a required amount and plan administrators often refer to it as a “refund”. If that is the case, the refund is permitted to be rolled to a Roth IRA.
Permalink Submitted by Alan - IRA critic on Fri, 2016-12-09 16:33
That makes sense. If so, the 1099R coding would be G and the Roth IRA 5498 would show the rollover amount in Box 2. If the contribution to the TRS was pre tax then the qualified rollover contribution to the Roth IRA would be taxable, but not if those contributions were after tax. If the rollover is taxable and increases client taxes too much, client could do a partial recharacterization of the rollover to a TIRA. The TRS should be providing a clear explanation of all the options available for this particular plan.