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Excess contribution in 2013--re-designate?

Posted: Tue Jan 14, 2014 12:13 pm
by runnergirl
In 2013, I had an excess contribution to my Roth IRA of $506.11 ($30.47 of this is earnings). These moneys came from an after-tax 401-K conversion to my Roth. I want to understand my options. (1) Withdraw this amount and pay a 10% penalty plus taxes. (2) Or recharacterize to a t-IRA (don't want to do this). (3) Allow it to remain in the Roth and apply it to 2014 contribution and pay a 6% penalty. Does option 3 still apply if I am only eligible for a Roth through the back-door approach?

Am I correct that these are my options? I am leaning towards option 3, but wanted your wise input.

Re: Excess contribution in 2013--re-designate?

Posted: Tue Jan 14, 2014 2:21 pm
by placeholder
There is no limit to the amount that can be rolled over into a Roth only on direct contributions.

Re: Excess contribution in 2013--re-designate?

Posted: Tue Jan 14, 2014 2:25 pm
by Alan S.
Why is the conversion an excess contribution? Is there incorrect rollover info from the 401k?

Re: Excess contribution in 2013--re-designate?

Posted: Tue Jan 14, 2014 2:52 pm
by DSInvestor
A rollover from 401k to Roth IRA is not an IRA contribution. It is possible to rollover $1M from 401k into Roth IRA and also make a $5500 Roth IRA contribution. The $1M rollover does not count towards the contribution limit and should not give you an excess contribution.

Did you also make direct Roth IRA contribution above and beyond the rollover? If you did make a contribution, was your income such that you fall into the phase out range to reduce your max Roth IRA contribution?

If you did not make any Roth IRA contributions but your tax software is telling you that you have an excess contribution, it could be that you entered your 401k to Roth IRA rollover as a contribution rather than a rollover.

Re: Excess contribution in 2013--re-designate?

Posted: Tue Jan 14, 2014 8:25 pm
by runnergirl
My 401-K allows after-tax contributions plus pre-tax contributions plus employer contributions up to $51,000. Due to a higher than usual bonus, the employer match (based on a percentage of salary and bonus) was higher than I had figured. After maxing out the $17,500, plus the match, my after-tax contribution pushed me over the $51K limit. I did not expect this to happen and had already done an in-service rollover to my Roth at Fidelity in September 2013. Normally, I try to undershoot the limit due to the variable nature of the bonus, but apparently didn't undershoot enough.

I also contributed $5500 to a t-IRA in 2013 and then immediately converted to a Roth (back-door). I was alerted to the excess contribution by my 401-K provider.

Re: Excess contribution in 2013--re-designate?

Posted: Tue Jan 14, 2014 9:51 pm
by Alan S.
If you drained your after tax sub account AND the plan document applies any excess annual additions ( exceeds Sec 415c limit), then you are stuck with an excess contribution in your IRA that you then converted. You should receive two 1099R forms - one for the excess amount coded E and the other for the remainder of the rollover which will stick.

I would wait until you get the 1099R forms at the end of this month before acting further. That prevents you from being blind sided by a 1099R that is different than expected. In addition, there is no clear guidance whether you need to recharacterize the $506 conversion or not. The difficult part here may be convincing the Roth custodian to treat the $506 as an excess regular Roth contribution, but if the 1099R are as expected they can see that this part was not actually a rollover because excess annual additions cannot be rolled over. The Roth custodian would then calculate the earnings on the 506 while in the Roth and distribute the total to you. The earnings while in the Roth will be taxable and subject to penalty on your 2013 return even though you will not get the Roth IRA 1099R till NEXT January. But the $30.47 of earnings while in the 401k are taxable and not subject to penalty.

There is no 8606 here because this was a direct Roth rollover as I understand. You will report it on lines 16a and 16b of Form 1040, but any earnings while the 506 was in the Roth will go on 15b.

Finally, your question 3 - yes, since the 506 is treated as a regular Roth contribution, you could ordinarily leave it in, pay the 6% and then apply it to 2014. However, if your 2014 income will be too high to apply it, then you will incur another 6% excise tax each year until you can apply it. You can only apply it on Form 5329 if you are eligible for a regular Roth contribution. You will need to make that decision based on your best judgement.

Maybe post back if the 1099R forms are not as expected.