Overcontribution to after tax Roth 401k and in service back door conversion

Submitted by Whodiini on Mon, 2020-07-27 06:53

Person overcontributed to their aftertax Roth 401k, exceeding IRS limits on total amount. Normally this is not an issue because one can simply ask for a return of the excess contribution and the only tax impact is the earnings on their contributions. But this person also is retiring, so they want to do an in service transfer before retirement from the Roth 401k to a Roth IRA to avoid future RMD issues with the Roth 401k. If they do the in service transfer to a Roth IRA before getting a return of the excess contribution, can they ask for a return of the excess contribution from the Roth IRA even though it is no longer money overcontributed to the Roth 401k? Or does the money have to remain in the Roth 401k to be returned? Once retired, does the option of doing an in service transfer from the Roth 401k to Roth IRA dissappear?

Thanks



Submitted by Alan - IRA critic on Mon, 2020-07-27 16:19

  • Once a participant retires, any distribution is no longer “in service” and can be requested. The only restriction a plan might have then is to limit distributions to lump sum distributions only.
  • If participant is retiring this year, they can wait until retirement and do direct rollovers (pre tax and Roth) with no RMDs. If retiring next year, an inservice distribution this year can eliminate the value distributed from RMD considerations next year and beyond.
  • If there is an excess deferral and participant made deferrals to both pre tax and Roth, check with the plan to determine which account must fund the corrective distribution.
  • If participant does a lump sum distribution that overlooks the excess, the plan will consider the excess distributed to participant and the 1099R forms will show the excess as a corrective distribution not eligible for rollover, and the other 1099R showing the allowed direct rollover. SInce all the funds are now in a Roth IRA, there is an excess regular Roth IRA contribution that must be removed through the Roth custodian, as that is the only way to correct a partially disallowed rollover.  It is not expensive and not a tax reporting hassle unless the 401k administrator mishandles the 1099R forms. You are correct that if the excess deferral is Roth, the return will not be taxable, just the earnings on the excess.
  • If participant has any non Roth after tax amounts within the pre tax 401k, please advise.
  • If the excess Roth deferral is with one employer only, the employer should know it and be able to split out the distribution from the direct rollover to the Roth IRA, avoiding an excess Roth IRA contribution.

Submitted by Whodiini on Wed, 2020-07-29 06:42

Thanks for your response.  One thing I dont quite get.  Is there any difference between an in service partial rollover distribution from a Roth 401k to a Roth IRA or waiting after retirement (this year) and doing a rollover of the entire Roth 401k to a Roth IRA after refunding the excess contribution to the Roth 401k.  The plan allows both in service and out of service rollovers.  Does it have any impact on future RMD amounts, since it is in a Roth IRA which do not have RMDs.

Submitted by Alan - IRA critic on Wed, 2020-07-29 15:03

  • The difference is one year of Roth 401k RMDs if the participant is 72 or older. If the participant waits until they retire, they will be subject to a Roth 401k RMD for the retirement year. However, if they roll over the balance in the year prior to retirement, they will avoid RMDs on the amount of the rollover. Sometimes, an inservice rollover is done and later that same year the participant retires. In that case, it’s an RMD year and the earlier in service rollover is treated as including the RMD and that amount will be an excess contribution to the Roth IRA. To avoid that the inservice rollover should be done prior to the retirement year. 
  • If done prior to the retirement year and the person continues to contribute right up to retirement, there will be a new but smaller balance in the plan accumulated after the in service rollover and before the end of that year that will be subject to RMDs in the following retirement year. Sometimes this is unavoidable when the person does not have a planned retirement date locked in. Many of those who do a direct rollover to a Roth IRA while still working reduce the balance in the Roth 401k and even though they continue to contribute until retirement, the balance subject to that final year of RMD will be much smaller, but they will owe a small RMD when they finally do the lump sum rollover right after retirement.

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