Indirect rollover/Roth conversion – 401(k) withdrawal repaid to Roth IRA
Taxpayer took $97,000 out of qualified retirement plan in early May 2022. They did not have any after-tax basis in the plan. They put this $97,000 back into a Roth IRA at the end of May 2022 with the intention of doing a Roth conversion. I’m preparing their 2022 tax return and trying to make sure I am correctly reporting the transaction. I am showing the $97,000 as taxable income on line 5b, not subject to an early distribution penalty. Is that the only federal tax return reporting needed? I know you report traditional IRA to Roth IRA conversions on Form 8606 but this was a qualified plan to Roth IRA so I’m thinking no 8606 is needed?
Permalink Submitted by David Mertz on Thu, 2023-09-21 17:37
The word ROLLOVER must be included next to line 5b. (Movement of funds from a qualified retirement plan to a Roth IRA is a rollover even when coming from the traditional account in the plan.) There is nothing to report on Form 8606 regarding this transaction.
Permalink Submitted by Alan - IRA critic on Thu, 2023-09-21 18:32
There should have been 20% withheld from the 401k distribution and shown on the 1099R, since this was not a direct rollover. Did the taxpayer replace that 20% in the Roth IRA to have a complete rollover?
Permalink Submitted by Cassandra Lenfert on Mon, 2023-10-09 14:39
Yes they repaid the full amount. They had used the distribution basically as a bridge loan to buy one house, then when they sold their old house they repaid the full distribution amount to a Roth IRA.
Permalink Submitted by Alan - IRA critic on Mon, 2023-10-09 15:12
That was very risky as meeting a rollover deadline based on a real estate closing often results in failure since so many things can go wrong. Even if the deadline is met, it must be very stressful but they lucked out this time.