Auto enrolled calsavers account beyond contribution limit

[Boogiebogle]

Apparently CA forces small employers to offer calsavers retirement plan with default option of auto enrollment. As a result I got auto enrolled in it's roth IRA last year without any explicit action on my part. My 2022 income is 140k. However, combined with my spouse income we are well beyond Roth IRA contribution limit. So now I need to deal with ~2k$ which got in there as paycheck deduction. What's the best course of action for me? I don't like funds in the plan. High ER. So, can I just liquidate that IRA and move cash out of that account. Any tax implications for that? Or do I need to move it out in kind in another brokerage and then sell? Also I assume I need to pay taxes on the growth. Will I get 1099 from calsavers when I liquidate or do I need to close the account to get that .

[Duckie]

Apparently CA forces small employers to offer calsavers retirement plan with default option of auto enrollment. As a result I got auto enrolled in it's roth IRA last year without any explicit action on my part.

First, if not already fixed, make sure you're no longer auto-enrolled. And once the money is removed close that account.

My 2022 income is 140k. However, combined with my spouse income we are well beyond Roth IRA contribution limit. So now I need to deal with ~2k$ which got in there as paycheck deduction. What's the best course of action for me? I don't like funds in the plan. High ER. So, can I just liquidate that IRA and move cash out of that account. Any tax implications for that? Or do I need to move it out in kind in another brokerage and then sell? Also I assume I need to pay taxes on the growth.

You have two options:

1. You can have the excess contribution "recharacterized" which will switch the contribution plus earnings or minus losses from the Roth IRA to a TIRA. At that point you could convert the TIRA to a Roth IRA. If you do this you will have to file Form 8606 for 2022 to report the non-deductible contribution and add the required recharacterization statement to your 2022 Form 1040. The conversion will be reported on your 2023 Form 8606. This only works if you have no other non-Roth IRAs (Traditional IRA, Rollover IRA, SEP IRA, or SIMPLE IRA) because of the pro-rata rule. This is covered in the "Recharacterizations" section starting on page 4 of Instructions for Form 8606:
   • "You made a contribution to a Roth IRA and later recharacterized part or all of it in a trustee-to-trustee transfer to a traditional IRA. Report the nondeductible traditional IRA portion of the recharacterized contribution, if any, on Form 8606, Part I. Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2022, include the amount transferred from the Roth IRA on your 2022 Form 1040, 1040-SR, or 1040-NR, line 4a. If the recharacterization occurred in 2023, report the amount transferred only in the attached statement, and not on your 2022 or 2023 tax return."
2. You can have the excess contribution removed. Don't remove it yourself, have the Roth IRA custodian do it. They will return the contribution plus earnings or minus losses to you. This is covered in the "Return of IRA Contributions" section also starting on page 4:
   • "If, in 2022, you made traditional IRA contributions or Roth IRA contributions for 2022 and you had those contributions returned to you with any related earnings (or minus any loss) by the due date (including extensions) of your 2022 tax return, the returned contributions are treated as if they were never contributed. Don’t report the contribution or distribution on Form 8606 or take a deduction for the contribution. However, you must include the amount of the distribution of the returned contributions you made in 2022 and any related earnings on your 2022 Form 1040, 1040-SR, or 1040-NR, line 4a. Also include the related earnings on your 2022 Form 1040, 1040-SR, or 1040-NR, line 4b. Attach a statement explaining the distribution. Also, if you were under age 59 1/2 at the time of a distribution with related earnings, you are generally subject to the additional 10% tax on early distributions (see Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, and its instructions)."

Decent tax-software can handle either method as long as you answer the questions correctly.

Will I get 1099 from calsavers when I liquidate or do I need to close the account to get that.

You will get a 1099-R for the distribution whether the account is open or closed.

[Boogiebogle]

Thanks duckie for your reply. Very helpful. I need to choose option 2 since I did backdoor Roth IRA in 2022. Few followup questions,:
1) In this case I don't need to file 8086, correct?
2) will custodian provide ,1099-r at the same time as distribution?
3) since I know contribution and earnings I don't need 1099-r while filing taxes. Or 1099-r contains additional information I will need?

Thanks again for your help.

[Duckie]

I need to choose option 2 since I did backdoor Roth IRA in 2022. Few followup questions,:
1) In this case I don't need to file 8086, correct?

Correct.

2) will custodian provide ,1099-r at the same time as distribution?

I doubt it. Since the distribution will happen in 2023 you probably won't get the 1099-R until January 2024.

3) since I know contribution and earnings I don't need 1099-r while filing taxes. Or 1099-r contains additional information I will need?

I'm not sure. You will already be reporting this and paying any taxes on your 2022 Form 1040 so I'm not sure what happens on your 2023 taxes when you add the 1099-R.

[Boogiebogle]

1. You can have the excess contribution "recharacterized" which will switch the contribution plus earnings or minus losses from the Roth IRA to a TIRA. At that point you could convert the TIRA to a Roth IRA. If you do this you will have to file Form 8606 for 2022 to report the non-deductible contribution and add the required recharacterization statement to your 2022 Form 1040. The conversion will be reported on your 2023 Form 8606. This only works if you have no other non-Roth IRAs (Traditional IRA, Rollover IRA, SEP IRA, or SIMPLE IRA) because of the pro-rata rule. This is covered in the "Recharacterizations" section starting on page 4 of Instructions for Form 8606:
   • "You made a contribution to a Roth IRA and later recharacterized part or all of it in a trustee-to-trustee transfer to a traditional IRA. Report the nondeductible traditional IRA portion of the recharacterized contribution, if any, on Form 8606, Part I. Don’t report the Roth IRA contribution (whether or not you recharacterized all or part of it) on Form 8606. Attach a statement to your return explaining the recharacterization. If the recharacterization occurred in 2022, include the amount transferred from the Roth IRA on your 2022 Form 1040, 1040-SR, or 1040-NR, line 4a. If the recharacterization occurred in 2023, report the amount transferred only in the attached statement, and not on your 2022 or 2023 tax return."

I am wondering if I can utilize this option. We don't qualify for either of traditional or roth IRA because of income limits. However, I am wondering if I can recharacterize my 2022 calsavers Roth IRA to tIRA in 2023 and then do backdoor tIRA to Roth IRA afterwards. So, I will get my calsavers Roth IRA transferred to fidelity tIRA and then do backdoor to fidelity Roth IRA. Is that allowed ? Note I havent made any contributions to traditional or Roth IRA in 2023. In 2022, I did backdoor from tIRA to roth IRA in fidelity. If this works, then I need to file 8086 part 1 with 2022 taxes alongwith recharacterization statement. And then need to file 8086 with 2023 taxes as well. Is that correct?

[placeholder]

You can't recharacterize a prior year contribution to current so just get it returned and make a new contribution for 2023.

[Duckie]

We don't qualify for either of traditional or roth IRA because of income limits. However, I am wondering if I can recharacterize my 2022 calsavers Roth IRA to tIRA in 2023 and then do backdoor tIRA to Roth IRA afterwards.

You have already maxed your 2022 personal Roth IRA using the backdoor method so that cannot be undone. (If you had made a direct Roth IRA contribution you could have withdrawn it, but you converted and there is no do-over.) You cannot contribute more to any Roth IRA for 2022 so that CalSavers account is an excess for 2022. Any recharacterization to the CalSavers Roth IRA would be for 2022 which is already maxed so that option is out. You need to remove the excess completely. Contact CalSavers and have them remove the ~$2K Roth contribution plus earnings.

I hope you have contacted your employer to stop this for 2023.

So, I will get my calsavers Roth IRA transferred to fidelity tIRA and then do backdoor to fidelity Roth IRA. Is that allowed?

No, it is not allowed.

Note I havent made any contributions to traditional or Roth IRA in 2023. In 2022, I did backdoor from tIRA to roth IRA in fidelity. If this works, then I need to file 8086 part 1 with 2022 taxes alongwith recharacterization statement. And then need to file 8086 with 2023 taxes as well. Is that correct?

You will need to file Form 8606 for your personal TIRA to Roth IRA stuff, but you CANNOT recharacterize the CalSavers Roth IRA so that is not correct.