HCE Rollover Roth 401k to Roth IRA excess contribution/corrective distribution

Hi,

In Oct. 2019, I left my job after being there 19 years. I was an HCE. In Nov. 2019, I rolled over my old company’s TRowe Price held Roth 401k to my long existing Roth IRA and Traditional IRAs held at Vanguard. In March 2020, I received a letter from TRP explaining that since I rolled over my Roth 401k at the end of 2019, thus creating a 0 balance, my corrective distribution in the amount of $2525.20 needs to be removed if it was rolled over to another plan. I contacted TRP to have them do an earnings calculation so that I could remove the proper amount from my ROTH IRA at VG. I did end up removing the required amount by April 13, 2020. I did not report anything on my 2019 taxes regarding this situation. In January 2021, I received a 2020 Form 1099-R coded with PJ in box 7.

1. Since I removed ROTH contributions plus earnings in April 2020, only the earnings should be taxable because I already paid taxes on the Roth contributions in 2019. If this is correct, are the earnings taxable in 2019 (I’ll have to file an amended return) or 2020? The code descriptions on the back of the 1099-R state that the amounts are taxable in 2019. I would think that if I received the earnings in 2020, they should be taxed in 2020. If I can report the earnings in 2020, how to I do this using H&R Block software? When I enter the 2020 1099-R into the program, it says that it cannot tax the amount in 2020 because of the codes P and J inbox 7. It says it needs to be taxed in 2019 using an amended return. As an option, I could enter the earnings as “other income” with an explanation.

2. Do I need to fill out Form 5329? Are there any penalties involved (10% or 6 %). I am 50 years old.

Thanks



When an excess contribution is returned from an IRA, the earnings are taxable in the year in which the excess was made. That year was 2019, therefore the Code P on the 1099R. This requires an amended 2019 return, but if the amount is very small, you could let the IRS just send you a tax due Notice. The 1099R you have does not show on or affect your 2020 return at all, but the program will probably note the corrective distribution to track your Roth contribution basis for future purposes.
You will need a 5329 with the amended 2019 return to report the 10% penalty on the earnings distributed (the amount in Box 2a).  There is no 6% excise tax because you removed the excess by the due date.
You did not ask about your 2019 return, but it’s odd that you contacted TRP for an earnings amount. Didn’t TRP send you a separate 2019 1099R showing the distribution of the excess Roth contribution?  That 1099R would be the excess Roth contribution made at VG that you had removed and VG would calculate the earnings for the time they held this excess in your Roth IRA and enter that amount in 2a of the 1099R you posted about here.

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