Withdraw Roth 403b, redeposit earnings?

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wineandplaya
Posts: 313
Joined: Fri Sep 14, 2018 9:42 am

Withdraw Roth 403b, redeposit earnings?

Post by wineandplaya »

My wife just made a total distribution of her 403b. The provider will mail her two checks, one for the pretax monies and one for the Roth monies. The check for the pretax monies is made out to her traditional IRA provider and we plan to forward that check for a direct rollover. The check for the Roth monies, on the other hand, is made out to her. It consists of both earnings and after-tax contributions.

Can we make a deposit of the amount corresponding to just the earnings portion to her Roth IRA within the 60-day rollover window and thus avoid paying taxes and penalty? Or do we have to rollover the contributions too to avoid taxes? I'm not sure if the pro-rata rule applies or not.
Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Withdraw Roth 403b, redeposit earnings?

Post by Alan S. »

wineandplaya wrote: Tue Jul 09, 2024 10:32 am My wife just made a total distribution of her 403b. The provider will mail her two checks, one for the pretax monies and one for the Roth monies. The check for the pretax monies is made out to her traditional IRA provider and we plan to forward that check for a direct rollover. The check for the Roth monies, on the other hand, is made out to her. It consists of both earnings and after-tax contributions.

Can we make a deposit of the amount corresponding to just the earnings portion to her Roth IRA within the 60-day rollover window and thus avoid paying taxes and penalty? Or do we have to rollover the contributions too to avoid taxes? I'm not sure if the pro-rata rule applies or not.
She will avoid any tax or penalty because when a 60 day rollover is done from a designated Roth distribution, the rollover is treated as first coming from the gains included in the distribution. Applicable IRS Reg 1.402A-1, QA 5(b) follows:
(b) In the case of an eligible rollover distribution from a designated Roth account that is not a qualified distribution and not paid as a direct rollover contribution, if less than the entire amount of the distribution is rolled over, the part that is rolled over is deemed to consist first of the portion of the distribution that is attributable to income under section 72(e)(8).
Ignoring the pre tax direct rollover which also must be reported on lines 5a and 5b of Form 1040, the designated Roth gross distribution will be also be shown on 5a and "rollover" entered next to 5b. 5b will be blank because none of these rollovers will be taxable.

Also, note that 20% mandatory fed withholding on the amount of gain will be deducted from the distribution check, but the gross amount of gain will have to be rolled over leaving the amount not rolled over reduced by the amount withheld.

Finally, since she is rolling over nothing but gains, her Roth IRA basis will not increase, only the balance will increase. Therefore, the amount she rolls over will all be treated as Roth IRA gains until her Roth IRA is qualified.
Topic Author
wineandplaya
Posts: 313
Joined: Fri Sep 14, 2018 9:42 am

Re: Withdraw Roth 403b, redeposit earnings?

Post by wineandplaya »

Thank you, Alan S!
Alan S. wrote: Tue Jul 09, 2024 11:23 am Finally, since she is rolling over nothing but gains, her Roth IRA basis will not increase, only the balance will increase. Therefore, the amount she rolls over will all be treated as Roth IRA gains until her Roth IRA is qualified.
I didn't realize that rollovers from Roth 401(k)/403(b) were treated differently from "conversions" from pre-tax 401(k)/403(b), but I guess it makes sense.
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