Save the 1099-R from Your Roth Rollovers

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At all times and at any age, you can withdraw as much as you have contributed to your Roth individual retirement account (IRA) without tax or penalty. Unfortunately, keeping track of how much you have contributed is complicated. First, there is no convenient place to keep track of regular Roth IRA contributions. Instead, you need to maintain your own records. Second, there are many different ways that assets can be added to a Roth IRA and each one adjusts your Roth contribution basis slightly differently.

In this series, I am reviewing each type of contribution one at a time and explaining how much counts as Roth contribution basis and when. This article is about Roth rollovers from designated Roth accounts.

A designated Roth account is a separate account in a 401(k), 403(b), or governmental 457(b) plan that holds designated Roth contributions.

You are permitted to rollover balances from your designated Roth accounts such as a Roth 401(k) to your Roth IRA. Amounts which were “treated as investment in the contract” (a technical term) are included in your Roth IRA’s contribution basis.

Which amounts are “treated as investment in the contract” is either the contribution basis of your designated Roth account or the total amount of the rollover if the total amount is a qualified distribution. You can read about the complicated legal justification behind this in 26 CFR § 1.408A-10 “Coordination between designated Roth accounts and Roth IRAs.”

The summary is: The contribution basis of your rollover contribution is any amount which would have been nontaxable if distributed from the designated Roth account (either because it was contribution basis or because it was a qualified distribution).

Qualified distributions from designated Roth accounts are defined by the IRS as:

A qualified distribution from a designated Roth account is excludable from gross income. A qualified distribution is one that occurs at least five years after the year of the employee’s first designated Roth contribution (counting the first year as part of the five) and is made:

  • On or after attainment of age 59½,
  • On account of the employee’s disability, or
  • On or after the employee’s death.

For non-qualified distributions from a designated Roth account, “The distribution will be treated as coming pro-rata from earnings and contributions (basis).” (Note: This is different from a Roth IRA where distributions are assumed to come from contribution basis first and earnings last. In this way, rolling funds over to your Roth IRA before you distribute can actually make less of the withdrawals taxable.)

Putting all this together, this means that all of your designated Roth account rollover is counted as contribution basis if it both has been five years since you contributed to the designated Roth account and any one of the following is true:

  1. You are older than age 59 1/2.
  2. You are legally disabled.
  3. You are dead.

As it is unlikely that these requirements are met in early retirement, this means that the distribution is likely non-qualified and only the contribution basis of your employer plan is counted as contribution basis for your Roth IRA.

The instructions of Form 8606 state that “any amount rolled in from a designated Roth account that is treated as investment in the contract” should be counted as regular contribution basis on line 22. In this way, contributions to a designated Roth account, such as a 401(k) plan, count the same as regular contributions to your Roth IRA once those funds are rolled over into your Roth IRA.

When you do the rollover, your custodian will issue a 1099-R. On the 1099-R, you can find the contribution basis of that rollover on line 5 “employee contributions.”

If you’ve done the rollover in a year prior, digging up your old 1099-R or calling the old employer-sponsored custodian may help you find this number again. Another lead would be asking your employer for old payroll records.

However, the easiest way is to simply save your 1099-R and the numbers on it with the record of all your Roth IRA contributions in a file alongside where you store your tax returns.

Photo by Meritt Thomas on Unsplash

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.