Rollover Contributions on form 5498

Submitted by Steven Vitullo on Sun, 2024-05-19 06:06

Hi,

My question is in relation to a 5498 tax document I have for my ROTH IRA account. Looking at section 2 on form 5498 which lists the rollover contributions for the given year into this account. Is the amount given in section 2 considered a contribution for the purposes of non-qualified withdrawals before age 59.5 and would therefore be considered a contribution and can be withdrawn tax and penalty free under IRS withdrawals ordering rules stating that contributions come out first?

Secondly, does this scenario change and how if the rollover contribution money came from a 401K where ROTH-in-plan-conversations (RIPC) previously occurred with in 5 years on some of the moneys that was rolled over to the ROTH IRA? It seems like all ROTH and after-tax contributions to the 401K rollover into the ROTH IRA as contributions?

Thanks.



Submitted by Alan - IRA critic on Sun, 2024-05-19 16:41

Yes, any amount shown in either Box 2 or 3 are treated as Roth IRA rollover or conversion contributions and if the rollover is the first contribution of any kind to a Roth IRA, it will start the 5 year holding period for purposes of determining when the Roth IRA is qualified.

Under Roth IRA ordering rules these amounts come out after all regular Roth IRA contributions and will be tax free (taxes have already been made for these amounts). There is an exception for rollovers from a designated Roth (Roth 401k, Roth 403b, Roth 457b) account. Under the ordering rules these rollover amounts are treated as regular Roth IRA contributions up to the amount of contributions made to the Roth 401k, and the entire rollover amount including Roth 401k gains are treated as regular Roth IRA contributions if the Roth 401k was qualified.

If a rollover from a Roth 401k includes IRRs (in plan Roth rollover), per the Form 8606 Inst, the entire amount attributed to IRRs is treated as a regular Roth IRA contribution. Therefore, any such amounts are reported on line 22 of Form 8606 when a non qualified Roth IRA distribution is taken. A taxpayer that rolls a Roth 401k into a Roth IRA should immediately update their Roth IRA basis tracking to reflect these rules.

Now, if a so called mega back door Roth conversion is done, ie after tax non Roth contributions are made to the 401k and then rolled into a Roth IRA, because these amounts were never in the Roth 401k portion of the plan, they are treated as non taxable Roth IRA conversions once in the Roth IRA for purposes of the ordering rules. As you can see, rollovers from a Roth 401k are treated very differently once in the Roth IRA than rollovers coming from the pre tax account.

Note that the above issues are limited to the income tax on Roth IRA distributions. The conversion 5 year holding period for those under 59.5 with respect to the 10% penalty is tracked differently and requires use of Appendix C of Pub 590 B.

Submitted by Steven Vitullo on Mon, 2024-05-20 04:03

I am not sure I understand all of this.

What I am trying to do is figure out my contribution basis for my ROTH IRA in the event I need to pull out contributions on my IRA before age 59.5.  I have all my 1099-R coded both G and H from my 401K and Roth 401K and my 5498s for the ROTH IRA were amounts where rolled into.  Do you have any resources that show in more complicated cases like this how to update your contribution basis based on these 1099-Rs and 5498?  Maybe internet resources or a good book showing lots of examples?

Thanks.

Submitted by Alan - IRA critic on Mon, 2024-05-20 16:10

Form 5498 will only confirm the gross amount of a rollover contribution. You need the 1099R forms to determine how much Roth IRA basis these rollovers add to your Roth IRA.

With respect to the H coded 1099R forms you may have received, because your Roth 401k balances were not yet qualified, you only need to add the amounts in Box 5 of these forms to determine how much your regular Roth IRA contribution basis was increased. The following IRS Reg (Q 3) explains this:  26 CFR § 1.408A-10 – Coordination between designated Roth accounts and Roth IRAs. | Electronic Code of Federal Regulations (e-CFR) | US Law | LII / Legal Information Institute (cornell.edu)

For G coded 1099R forms, you must determine how much (if any) went to your regular IRA vs. Roth IRA. The amounts that went to your Roth IRA (confirmed by the Roth 5498) are treated as rollover Roth contributions rather than regular Roth contributions, and therefore add to your Roth IRA conversion basis only, never to your Roth IRA regular contribution basis. Conversions distributed from a Roth IRA are non taxable, but if you take a Roth IRA distribution large enough to exhaust all your regular Roth IRA contributions, conversions then come out with the oldest first and if a distribution is done in the first 5 years from the rollover, the portion of the rollover that was taxable is subject to a 10% penalty before age 59.5. Therefore, if your rollovers from the non Roth after tax sub account were not taxable because they were done before any gains were generated on those after tax contributions, a distribution from your Roth IRA of these rollovers (part of your Roth IRA conversion basis) would not be subject to the 10% penalty.

The income tax considerations are less confusing and easier for you to track then amounts treated as Roth IRA conversions, since you have to keep track of the actual year these rollovers were done and also how much of each rollover was taxable. Therefore, it is much simpler if you can limit any distributions to your regular Roth IRA contribution basis.

I do not know of any simple explanation that ties all this together. Of course, all this tracking goes away once you have a held a Roth IRA 5 years and reach 59.5.

Submitted by Alan - IRA critic on Mon, 2024-05-20 18:14

I am not aware of any plain English explanation of this that incorporates both sources of Roth IRA contributions. But the following IRS Reg copied below might help.

Q-3. For purposes of the ordering rules on distributions from Roth IRAs, what portion of a distribution from a rollover contribution from a designated Roth account is treated as contributions?

A-3. (a) Under section 408A(d)(4), distributions from Roth IRAs are deemed to consist first of regular contributions, then of conversion contributions, and finally, of earnings. For purposes of section 408A(d)(4), the amount of a rollover contribution that is treated as a regular contribution is the portion of the distribution that is treated as investment in the contract under A-6 of § 1.402A-1, and the remainder of the rollover contribution is treated as earnings. Thus, the entire amount of any qualified distribution from a designated Roth account that is rolled over into a Roth IRA is treated as a regular contribution to the Roth IRA. Accordingly, a subsequent distribution from the Roth IRA in the amount of that rollover contribution is not includible in gross income under the rules of A-8 of § 1.408A-6.

Submitted by Alan - IRA critic on Mon, 2024-05-20 18:19

Am not aware of any simple consolidated explanation. For the H coded 1099R see QA 3 of the following IRS Reg: https://www.law.cornell.edu/cfr/text/26/1.408A-10

For G coded 1099R forms, no amount can be treated as regular Roth IRA contributions. The value of such rollovers that went to the Roth IRA (confirmed by the 5498 issued by the Roth custodian) are all treated as Roth IRA conversions done in the rollover year. Therefore, these amounts do not come out of the Roth IRA until all regular contributions have been distributed under the ordering rules, and while they will all be non taxable for income taxes, the 5 year conversion holding periods apply (until age 59.5) with respect to the 10% penalty on the taxable amount of such rollovers. This taxable amount (shown in Box 2a of the G coded 1099R forms) should be very small if your rollovers are coming from the after tax non Roth account in the 401k. Therefore, the tracking for this penalty has more moving parts than the income tax aspects.

All your Roth IRA distributions prior to qualification are reported on Form 8606, and you are asking about the proper amounts to show on lines 22 (regular Roth basis), and 24 (conversion basis). If you limit your distributions to just the line 22 amounts it will be much simpler as there would be no tax or penalty.

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