Rolled over Roth Distribution

[David]

TP received a 1099-R for a Roth distribution with the full amount included in box 2a as taxable, yet box 2b is marked as taxable amount not determined. The distribution code in box 7 is 2 - early distribution - exception applies.

 

The TP rolled over the distribution into a corporation 401K plan. The corporation was started by his wife and himself.

 

It appears, from my research, a distribution from a Roth account cannot be rolled over into a designated Roth account - it has to be a direct rollover.

 

Am I understanding the rules correctly? Therefore, the TP may have a tax impact from the rollover?

 

Thanks.

[kcjenkins]

OK, first, a Roth distribution can not be rolled into a 401K. So he's got to take it out of the 401K. A distribution that is not a qualified distribution will be partially included in gross income if there are earnings in the account.  Only the earnings will be taxable.  Within 60 days of receipt he can roll it into a Roth IRA.  If he's past the 60 days, he's out of luck.  The earnings portion will be taxable.

[B. Jani]

Shouldn't rollover be done trustee to trustee?

[David]

The TP had a Roth 401K with his previous employer. He started his own corporation and set up a self-directed 401K plan. He pulled out the funds from his 401K he had with his previous employer and recieved a check. He immediately deposited that check in his new corporation self-directed 401K plan.

 

Since he deposited the funds in his new 401K, which includes a Roth, within 60 days, wouldn't this be considered a rollover?

 

Thanks.

[RitaB]

David, this is from  http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#rollovers.  (A Roth 401(k) is a designated Roth account.)

 

Can I roll over distributions from a designated Roth account to another employer's designated Roth account or into a Roth IRA?

Yes. However, because a distribution from a designated Roth account consists of both pre-tax money (earnings on the Roth contributions) and basis (Roth contributions), it must be rolled over into a designated Roth account in another plan through a direct rollover. If the distribution is made directly to you and then rolled over within 60 days, the basis portion cannot be rolled over to another designated Roth account, but can be rolled over into a Roth IRA.
 

If only a portion of the distribution is rolled over, the rolled over portion is treated as consisting first of the amount of the distribution that is includible in gross income. Alternatively, you may roll over the taxable portion of the distribution to another plan’s designated Roth account within 60 days of receipt. However, your period of participation under the distributing plan is not carried over to the recipient plan for purposes of measuring the 5-taxable-year period under the recipient plan.

[David]

Thanks, Rita for the information. The client and I are re-visiting this.

 

It may be worse than I thought. The TP is not 59 1/2. He received the total Roth distribution of $52K from his 4101K. Within 60 days he deposited the full amount into his self-directed company (which he owns) 401K plan.

 

If $3K of the $52K distribution is earnings is my understanding, as follows, of how to treat this correct?

 

Since this wasn't a direct rollover to a 401K Roth plan, the $3K earnings will be taxable income. The $49K principal will not be taxed.

 

However, he is only allowed to rollover $3K (the earnings amount taxed) into the new 401K plan.

 

If this is the correct treatment of this situation then what happens to the additional $49K that was contributed to the self-directed 401K plan? Will this be treated as excess Roth contribution?

 

Thanks for your help with this.

[RitaB]

 

 

If this is the correct treatment of this situation then what happens to the additional $49K that was contributed to the self-directed 401K plan? Will this be treated as excess Roth contribution?

 

Thanks for your help with this.

 

 

Wow, you are correct, it's complicated.  He has done something that is forbidden, and I don't know that there are any instructions to cover what to do after instructions are not followed.  The logical assumption would be that nobody would get to this point. 

 

I'm thinking he takes the $49k out of the second ROTH 401(k) like it never even happened.  Could it be that easy?  Probably not.  I'm looking... Anybody else?