Roth IRA 60 Day Rollover
Hello, I was wondering if I can get your thoughts on the following scenario.
Someone takes a Roth IRA distribution that consists of both tax free basis and taxable earnings and decides to roll a portion of the distribution back within 60 days. How does the IRS view the portion that was rolled back? Is the rollover amount a pro rata amount of both basis and earnings? Or do they view the first money rolled back to represent the earnings portion that would have been taxable if not rolled back?
If you have any good resources that confirms this, please provide if possible. Thanks!
Permalink Submitted by Alan - IRA critic on Tue, 2021-01-05 01:59
The IRS is guided by Form 8606. Only the amount of the distribution NOT rolled back is reported as a Roth IRA distribution on line 19. The ordering rules for Roth distributions are then used to determine the taxable amount, if any, of the line 19 distribution. Because the ordering rules treat regular and conversion contributions as coming out first, the net effect is that the earnings are rolled back first, which is a taxpayer friendly provision.
Permalink Submitted by David Mertz on Tue, 2021-01-05 02:08
[Edit: Alan responded while I was typing the same response.] The taxable and nontaxable amounts are calculated on Form 8606 Part III on the net distribution, the gross amount distributed minus the amount rolled over. Amounts rolled over are not included on Form 8606. See the first bullet of the instructions for line 19 of Form 8606: https://www.irs.gov/pub/irs-pdf/i8606.pdf
Permalink Submitted by Alan - IRA critic on Tue, 2021-01-05 02:34
Designated Roth distributions are not subject to the Roth ordering rules. Therefore, for the partially rolled over Roth 401k distribution, the IRS Regs directly state that the taxable amounts are treated as the first dollars rolled over. Copy of provision in Reg 1.402A-1, QA 5 copied below:
“(b) In the case of an eligible rollover distribution from a designated Roth account that is not a qualified distribution and not paid as a direct rollover contribution, if less than the entire amount of the distribution is rolled over, the part that is rolled over is deemed to consist first of the portion of the distribution that is attributable to income under section 72(e)(8).”