In-Service Roth 401K Rollover to Existing Roth IRA Followed by Retirement

Submitted by carol wagner on Mon, 2023-06-26 04:33

For the last several years, I have been of an age where I must take RMD distributions from my IRA retirement accounts, but not from my 401K as I was fully employed until recently. I have 2 questions. Question (1): In January 2023, while still employed, I performed an in-service rollover of my entire Roth 401K balance to my then-existing Roth IRA. Although I was still fully employed at that time, should I have first taken a distribution from the Roth 401K before rolling it over? I don’t want to encounter a penalty and would need to file the appropriate form immediately if I should have taken a distribution before the 2023 in-service rollover to my Roth IRA. (I understand that Roth 401K distributions will no longer be mandatory beginning with 2024.) Question (2): In late March, 2023 I retired from my employment. I understand that I must begin to take RMD withdrawals from my 401K which still holds a pre-tax balance. Given that I retired in 2023, do I now take a pre-tax RMD distribution in 2023 based on my 2022 year end pre-tax balance or does it wait until 2024, the year following my retirement? (Note: I do not want to have to take 2 withdrawals in the same calendar year.)

Thank you.



Submitted by Alan - IRA critic on Mon, 2023-06-26 17:37

  1. Since separated from service in 2023, this became an RMD distribution year and the January distribution must be reported as an RMD and not a rollover to the extent of the RMD. What makes your situation somewhat unique is that your distribution was from the Roth sub account. Per IRS Reg 1.401(a)(9)-8 QA 2, your plan RMD is aggregated between the pre tax and Roth sub accounts, and that means the January distribution was an RMD to the extent of the total RMD for both the Roth and pre tax accounts. The total RMD for both sub accounts was not eligible for rollover and is an excess contribution to your Roth to the extent that you did not make a regular Roth IRA contribution that you were eligible for. Perhaps an example will illustrate this. Assume your RMD for the pre tax account was 20,000, and the RMD for the Roth 401k was 10,000. Total RMD is therefore 30,000 and that portion of the rollover was not eligible and you would have a Roth excess contribution of 30,000. However, if you were eligible for a regular Roth contribution of 7500 that you did not make, the excess is reduced to 22,500. The Roth distribution is probably qualified and therefore tax free, but this rule results in more of your Roth assets being distributed than you probably wanted. Yes, if you knew you were going to retire, you should not have done this rollover, and waited for the plan to handle the RMDs before doing any rollover. Yet another question is whether the plan understands this aggregation rule and if not, they may want to distribute the pre tax RMD from that account without giving credit for the Roth distribution you already took. 
  2. I suggest you get this all straight with the 401k before correcting the Roth IRA excess amount, as you have plenty of time for that (till 4/15/2024 plus extentions). In fact, unless you get a clear answer about your 2023 1099R forms from the plan, you should wait until after you receive them in January so you do not compound the RMD reporting problem. I hope your 401k administrator can clarify this situation and understand the RMD aggregation rule between the pre tax and Roth portions of the plan. 
  3. If you want to level your income taxes, since the Roth RMD amount not eligible for rollover will be tax free and you only worked 3 months this year, your taxable income will probably not be too high for 2023. 
  4. Note that while your 401k plan RMDs could have been delayed until 4/1/2024 (your RBD), the distribution you took must be applied against your 2023 RMD.

Submitted by carol wagner on Thu, 2023-07-06 07:57

Thank you for your informative response.  My Roth 401K funds were not held for 5 years;  if I understand correctly the Roth 401K rollover to my Roth IRA is considered an  “excess contribution” to the Roth IRA (over $50K less any legitimate 401K RMDs for 2023) and will need to be withdrawn from the Roth IRA(?) as excess contributions; i.e., it will not be characterized or allowed as a “rollover” from the Roth 401K?  (I do understand RMDs are never eligible for rollover). Does this removal of excess contributions need to be accomplished in 2023 or can it be removed in 2024?  There is a 6% penalty for each year it remains as an excess contribution.   You are correct in that I did not anticipate taking those funds out at my current age  and hoped to keep them for a later date. After allowing for the 2023 RMDs, some of those funds will be subject to tax as they were not qualified by virtue of only being on deposit in the Roth 401K for 3 years.  Thank you for clarifying this situation and for any further response you can provide based on my updated question.  I should have consulted my accountant first, as the prior 401K custodian (a new one took effect in April, just to confuse things further) did not provide any guidance or info concerning rollovers/RMDs  at the time of my transaction.

Submitted by Alan - IRA critic on Thu, 2023-07-06 14:51

  • The rollover to your Roth IRA is an excess contribution to the extent of your total 2023 RMD for both the Roth and pre tax portions of the plan. This excess must be reported as a taxable distribution on your 1040 regardless of the coding of the 1099R. The corrective distribution can be done anytime with a deadline of 4/15/2024 or 10/15/2024 if you either file your 2023 return on time or file an extension. However, there is no benefit to wait since any gains on the excess will also have to be distributed with the corrective return. Any gain returned with the excess will be taxable in 2023 even if you correct it in 2024.
  • The Roth 401k distribution from the plan will include a pro rated amount of earnings since your Roth 401k is not qualified. But the plan may choose to not report this distribution as such, but as a direct rollover (Code H) as was processed. You would have to get the pro rated earnings amount from the plan or from your 2022 year end statement.
  • It is possible that the plan calculates their  RMDs separately for the pre tax and Roth accounts and is not aware of the RMD aggregation Reg (IRS Reg 1.401(a)(9)-8, QA 2). If they refuse to recognize this rule and distribution what would have been the pre tax RMD to you, that distribution would be treated as a plan distribution, not a statutory RMD since your Roth distribution was already applied to against your total plan RMD. As such, presuming that your total RMD was included in the Roth 401k rollover, any pre tax distribution the plan makes will be eligible for a 60 day rollover to your TIRA or Roth IRA because you would already have completed the full plan RMD with the January distribution. 
  • As indicated earlier, while this often happens with a pre tax rollover in what turns out to be the year of retirement, it rarely occurs with a Roth 401k rollover. I would expect that because your Roth 401k was opened in the last 3 years, the vast majority of the balance is your contributions, and the earnings portion and therefore the taxable portion will be small. Since you retired early this year and the Roth distribution taxable portion will be low, you might consider replenishing some of the value of your Roth IRA by a conversion from your TIRA after you completed any TIRA RMD for 2023. That would change your 2023 taxable income to be more in line with what it would have been had you taken the plan RMD from the pre tax 401k balance instead of the Roth balance.

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