Correcting a failed Roth rollover that was later transferred
I have an question relating to correcting a failed Roth rollover.
Here are the facts:
1. In 2019 my company & I contributed more than was allowed to my Fidelity 401K across pre-tax and after-tax accounts ($63k vs the $56k limit).
2. In early 2020 I did a direct rollover of the after-tax money from the Fidelity 401K to a new Fidelity Roth IRA.
3. I then did a ACAT transfer of the entire Fidelity Roth IRA to a Merrill Lynch Roth IRA. The Fidelity Roth account remained open with a zero balance.
4. Just recently I received a letter from my Fidelity 401K informing me of the excess $7k after-tax 401K contribution, and that it needs to be corrected.
Here is my question: can I just process the distribution of excess from my Merrill account? Or do I have to roll the excess amount (plus earnings) back into my Fidelity Roth and distribute the excess from there?
Thanks!
Permalink Submitted by Alan - IRA critic on Thu, 2020-09-10 00:36
Your 401k plan will probably report your direct rollover on two 1099R forms, one as a corrective distribution of the excess annual addition including earnings, and the remainder as a direct rollover. The amount of the corrective distribution will be treated as an excess regular Roth IRA contribution and you will need to explain this to Merrill to get them to distribute the correct excess and it’s earnings. Merrill will probably calculate the earnings just on their own Roth IRA earnings, but they might also ask you to provide the earnings on this excess amount while it was in the Fidelity Roth IRA. At this point, best to wait until you get the 1099R forms from the 401k plan so you know exactly the amount of excess to be returned from Merrill, upon which Merrill will calculate their Roth earnings to be returned to you. The earnings returned on the Roth IRA excess will be taxable in 2020 since the excess Roth IRA contribution was made in 2020.
Permalink Submitted by James Wang on Thu, 2020-09-10 00:48
Alan, thank you for the response. I’m actually not concerned about the amount of the excess, as Fidelity has already sent me a letter with the excess amount. I just need to calculate any earnings since the date of that letter. I’m more concerned that I’ll have a 1099-R from Fidelity indicating an excess contribtion, and then a 1099-R from Merrill indicating that I corrected the excess. I’m concerned the relevant tax form wont connect the dots between the two custodians and give me credit for the correction. But it sounds like that’s not an issue. thank you
Permalink Submitted by Alan - IRA critic on Thu, 2020-09-10 02:30
If Fidelity’s letter is clear between the excess annual addition amount (which you already know) and what it earned in the plan which should be reflected on their 1099R, then that is the amount of the excess Roth contribution that you will provide to Merrill. Then Merrill will calculate the earnings on that excess Roth IRA contribution and distribute the total. While you will have two 1099R forms indicating corrective distributions, only the earnings shown in Box 2a will be taxable. Some of those earnings were in the 401k and the rest in the Roth IRA. You might look at this as one excess contribution involving two accounts, with a 1099R for each. If the 1099R forms are correct, your tax program will generate the correct reporting. It is normal that the 401k plan treats your after tax contributions as the excess amounts that are returned to you.