Roth 401k Rollover Distribution

Submitted by Doug Neuman on Mon, 2011-03-14 05:28

I recently left my employer and had my Roth 401k fully distributed to be rolled over into my Roth IRA. They sent me two checks which were split according to my contributions and earnings. The earnings check was a direct rollover to the custodian of my ROTH Ira….The contributions check was made out to me directly. There was no withholding from it. I did NOT roll that in to my roth IRA account.

My assumption was that the roth 401k contributions were allowed to be returned just like a Roth IRA…Is this correct? Do I have to pay taxes on the contributions check? Some places I read since it was non qualified (roth 401k account was not 5 years old), that I would have to pay taxes based on the ratio of contributions to earnings. The earnings were 20% of that account.

Can I claim that as non taxable or do I need to pay tax on my original contributions? Where do I explain this situation? Do I add on an additional statement worksheet where I explain that?



Submitted by Alan Spross on Mon, 2011-03-14 18:31

The IRS Regs do not deal directly with this situation, and only address designated Roth distributions that go in total either to a Roth IRA OR to the employee. If all paid to you, the first dollars you rolled to a Roth IRA would be the taxable amount, ie the earnings. But here you have a split distribution with the earnings transferred as a direct rollover and never distributed to you.

If this was in 2010, you should have two 1099R forms by now. The direct rollover should be coded H, but for the other one (your contributions) I need to know what shows in the various boxes. This is what the IRS will be guided by.
If the 1099R is as I expect, you will not owe any current taxes. Will respond further after your reply.



Submitted by Doug Neuman on Mon, 2011-03-14 21:01

Thanks for responding quickly.

Yes I got two 1099R forms and H for the earnings and a B1 for the contributions. On the B1 form, I have boxes 1 and 5 showing the same amount (total amount of my contributions).

if there’s anything else you need let me know.

In the event what I did was OK, I would assume I would have to explain this in writing somehow, no?



Submitted by Alan Spross on Mon, 2011-03-14 21:54

As things currently stand, I would just show the total Box 1 amounts on line 16a, and show nothing on 16b with “rollover” entered next to 16b. Do not attach a statement since you are reporting consistent with the 1099R forms. If you use tax software, this is the output you should be looking for. The “rollover” only refers to the H coded earnings. The rest is a return of your contributions and is tax free. There should be no current tax on your 2010 return for this distribution.

For future reference, you need to update your accounting of your Roth IRA contribution status so you can properly report any Roth IRA distributions you might take in the future, but before your Roth IRA is qualified. The earnings from the designated Roth that you transferred to the Roth IRA are not qualified, so your total of Roth IRA contributions is NOT increased from what it was. The additional amount now in your Roth IRA are added to your Roth IRA earnings. If you happen to have negative earnings in your Roth IRA, this transfer would reduce the negative and may bring the total to a positive. Of course, if you hold your Roth IRA until it is qualified (5 years and age 59.5) all these accounting requirements go away and the entire Roth IRA will be tax free.



Submitted by Doug Neuman on Tue, 2011-03-15 01:09

Ok this is exactly what the tax software did for me. So the amount on line 16a should be the total amount of BOTH 1099R’s right?

When you say update my accounting, do you mean I need to fill out another form like 8606 so the IRS knows my adjusted earnings/basis in my ROTH IRA? Or do you just mean update my own records for personal tracking?

My Roth actually does have a decent amount of losses since it’s fairly new. So this earnings rollover is just minimizing the losses right? If I have an overall loss in my ROTH IRA does that mean I cannot claim any future distribution as “original contributions?”



Submitted by Alan Spross on Tue, 2011-03-15 02:12

Yes, both 1099R forms total Box 1 on line 16a.

The accounting is just for your own IRA file in the event you take a Roth distribution before your Roth IRA is qualified. If you do, you will have to know the total regular contributions, total conversions, and the excess amount will be earnings. If you do not know these amounts when you take the distribution, filling out the 8606 will become a research project.

For a present Roth profile, the earnings transferred in will just reduce your loss or perhaps create a gain if it is exceeds your present loss. Your basis of regular and conversion contributions does not change, and those amounts still come out tax free before any earnings if you took a distribution. But you would need the correct totals to complete the 8606 to show this. Very few people have this information summarized in advance and it is very difficult to reconstruct it later. But no 8606 is needed now.



Submitted by Doug Neuman on Tue, 2011-03-15 05:54

So for next year if i took a distribution from my ROTH IRA, and the losses were still more than the earnings rollover from my roth 401k would that still be a tax free and penalty free distribution? or does the IRS see it as a distribution of earnings which is taxable?

I’d fill out a 8606 form at that point, I know

thanks so much for your help!



Submitted by Alan Spross on Tue, 2011-03-15 15:13

Your Roth IRA distribution would be tax and penalty free. The amounts of your regular contributions come out first, tax and penalty free, then conversions and last would be earnings if you have earnings. Positive or negative earnings do not change the amount of your contributions that can be distributed tax free. The only taxable amount would be the earnings if you have positive earnings and withdrew all your contributions first. The only thing that changes with your Roth IRA due to this rollover of earnings is that any losses will be less or will be offset enough so that your earnings would become positive. Your contribution amounts are not affected.

Note: If you converted funds after 2006 and you are not yet 59.5, distributions of those conversions would not be taxable but would have a penalty of 10% since they did not meet the 5 year conversion holding period. This also is not affected by the earnings rollover.



Submitted by Doug Neuman on Wed, 2011-03-16 06:31

Thank you so much for the help!I



Submitted by Lantz Bowman on Fri, 2011-03-18 15:48

I have a somewhat similar situation with a client. She is 60 years old and established a Roth IRA in 2006. In 2007, she began working at a new job and started contributing to her company’s Roth 403b plan. She recently left the company and we tried to rollover her Roth 403b into her Roth IRA. Her plan custodian says that since she did not meet the 5-year holding requirement (2012) it is a non-qualified distribution and the earnings ($18,000) will be treated as taxable income. Doesn’t the fact that she met the 5-year holding requirement with her Roth IRA allow the earnings to roll over tax-free as well? If so, could you please give me the IRS regulation that states this so I can pass it on to her plan custodian?



Submitted by Alan Spross on Fri, 2011-03-18 19:56

If the designated Roth account is directly rolled over to a Roth IRA, there is no tax due. This is clarified on p 7 of the attached IRS Notice:

http://www.irs.gov/pub/irs-drop/notice_2009-75.pdf

Even without a direct rollover if the client rolled over a distribution from the Roth 403b, the first dollars rolled over to the Roth IRA are deemed to be the taxable amounts (ie earnings) and current tax would be avoided. Moreover, since the client’s Roth IRA is now qualified, all the funds rolled in would be qualified once they became Roth IRA funds. When a non qualified designated Roth account is rolled to an IRA, the aging rules of the Roth IRA trump those of the designated Roth. For some taxpayers, they have to start over to meet the 5 year holding requirement for the Roth funds, but since the Roth IRA is already qualified, the rollover funds are qualified as well.

It is correct that earnings would be taxable if the distribution from the plan was not rolled over, but client is doing a rollover here. Hopefully the plan 1099R will be correct and show the direct rollover coding of H in Box 7.



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