Rollover Question

Submitted by Kevin O'Hearn on Fri, 2022-08-26 13:07

Hello,

I have a client who took $84k from a Roth IRA and wants to roll a portion of the funds back within 60 days. $41k is Roth basis (contributions) and $43k is earnings. My questions are below:

1. Are there ordering rules with Roth rollovers where the first amount rolled back would be deemed to be the taxable earnings portion? So if the client rolled back $43k, would that be considered a return of the taxable earnings portion?

2. What if the distribution originated from a Roth 401k instead of a Roth IRA? Does that change the answer in question 1?

3. What about Traditional IRA distributions that consist of both deductible and non-deductible contributions? Are rollovers returned on a pro rata basis? Or can only the taxable earnings portion be rolled back?

4. If the amount wanting to be rolled back is from a COVID related distribution taken in 2020 where they have 3 years to roll the funds back, does that change anything?

Thanks!



Submitted by Alan - IRA critic on Fri, 2022-08-26 14:28

  1. Yes, the portion not rolled back is reported on Form 8606 using the Roth ordering rules which apply distributions first to regular contribution basis. That means that the portion that would have been taxable is the first to be rolled back.
  2. A Roth 401k distribution cannot be rolled back to that plan, it would have to be rolled to a Roth IRA. The first portion rolled to a Roth IRA is the portion that would have been taxable, therefore the amount kept by the participant would be mostly non taxable.
  3. A TIRA distribution partly rolled over would result in the remaining amount not rolled over subject to the pro rating of IRA basis. Unlike Roth accounts, the pre tax portion of an IRA is not treated as the first dollars rolled over.
  4. It only changes the transaction dates and the timing of taxes due. Amended returns may be due in some cases, but the application of basis rules per the above are maintained.

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