Rollover from nondeductible 401K to Roth

[JB Story 1]

Client's tax advisor told client this would not be taxable, like a backdoor Roth.  But I cannot make that work.  The nondeductible contributions still must show up as excess deferrals.  Am I right or wrong?

[rbynaker]

Here's the first thing to come up on my Google search:

https://www.empower.com/the-currency/work/after-tax-vs-roth-401k

Note, these are not "excess" contributions, just after-tax contributions.

If done right, these are NOT included in the box 12 code D amount (you can have the client pull a final paystub to see the details).

You'll also have a 1099-R showing:

Box 1 = Gross distribution
Box 2a = $0 (or maybe a small amount of earnings)
Box 5 = Box 1 - Box 2a (same as Box 1 if no earnings)
Box 7 = G
IRA = NOT checked

Most of my clients that have this have "auto-conversion" turned on so as soon as they make the contribution from their paycheck it is immediately converted to Roth before there are any earnings.  Sometimes the Code G will throw off the software.  If there's anything in Box 2a you want that to show up as taxable on the 1040.  If that's not working, post back and maybe a Lacertian can help out with the data entry.

Rick

[qbteachmt]

You used the word Roth all by itself.

Megabackdoor is when a 401(k) (employer plan) accepts after-tax contributions. These are only a contribution once. Then it is converted to Roth 401(k), but since it is basis, there is no taxable event. That's an In Plan Rollover.

Or, they took nondeductible 401(k) money and moved it to Roth IRA? That is a distribution and a conversion. Again, when it is only the nondeducted funds, it is Basis and that would be a nontaxable rollover. Hopefully, there was no withholding.

"The nondeductible contributions still must show up as excess deferrals"

Must? Or, does? Because there might also be excess deferral. That step is the first thing, when it is being contributed to the 401(k). Deferral is how the contribution step happened. Did you examine their allowed limit and all their contributions to the various parts of the employer's 401(k) plan?

[JB Story 1]

Thanks so much for responding.

In this case, the taxpayer has 2 jobs and had the maximum taken from Job #1 and $5806 more taken from Job #2 which is in Box 12-D.  So, it was not taxed and shows up in software demands that it be entered in excess deferrals.  However, it was moved to a Roth just a day ago.

[qbteachmt]

"the taxpayer has 2 jobs and had the maximum taken from Job #1"

$23,000 and it was taxed? In 2024, the 401(k) contribution limit is $23,000 for employee deferrals and $69,000 for combined employee and employer contributions. For those age 50 and older, an additional $7,500 catch-up contribution is allowed, bringing the employee deferral limit to $30,500.

"and $5806 more taken from Job #2"

It's a limit per tax payer. Not per employer.

"So, it was not taxed"

This new employee amount at the new job wasn't taxed?

"and shows up in software demands that it be entered in excess deferrals."

What is your taxpayer's age?

In 2024, the mega backdoor Roth limit is $69,000 or $76,500 (includes $7,500 in catch-up contributions if you're 50 or older), compared to $23,000 or $30,500 if you're 50 or older in pre-tax contributions.

The mega backdoor Roth strategy allows you to contribute after-tax dollars to a 401(k) up to the combined limit, which can then be converted to a Roth 401(k) or Roth IRA.

First, take the allowable limit of $69,000; subtract your salary deferral of $23,000, and then deduct from that any employer match. The difference gives you the amount you can add after tax.

"However, it was moved to a Roth just a day ago."

That's got no bearing on if they were overcontributed in the first place.

[George4Tacks]

I think "client's tax advisor" should explain how to make it work. Maybe they can pay any extra tax and/or penalty due if their advise is incorrect. 

[rbynaker]

---

@JB Story 1 wrote:

Thanks so much for responding.

In this case, the taxpayer has 2 jobs and had the maximum taken from Job #1 and $5806 more taken from Job #2 which is in Box 12-D.  So, it was not taxed and shows up in software demands that it be entered in excess deferrals.  However, it was moved to a Roth just a day ago.

---

Okay, then yes, you have an excess deferral.  I would be shocked if your client can get a corrective distribution at this point.  If the one 401(k) is already closed/converted to Roth IRA, that's not coming back (and would be fully taxable as a Roth conversion).

You MIGHT get the other employer to correct it but they usually need more than 4 days notice.  Since there's no error from their perspective, it doesn't taint their plan if they don't correct it.  Instead your client will end up paying tax on that as an excess contribution now (1040 Line 1h) and again when they retire and start taking distributions.

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf#page=24

The following types of income must
be included in the total on line 1h.
• Excess elective deferrals. The
amount deferred should be shown in
box 12 of your Form W-2, and the “Re-
tirement plan” box in box 13 should be
checked. If the total amount you (or
your spouse if filing jointly) deferred for
2024 under all plans was more than
$23,000 (excluding catch-up contribu-
tions, as explained later), include the ex-
cess on line 1h.

[qbteachmt]

This still seems confusing:

"The nondeductible contributions still must show up as excess deferrals."

"it was moved to a Roth just a day ago."

Have you confirmed this qualified under the megabackdoor rules, then? You have two different employers, and the employer limit is per employer, even though the employee limit is per employee. If it was megabackdoor, you have that combined limit.

But then you tell us:

"So, it was not taxed"

Not Taxed means moving it to Roth is an In Plan Conversion and would be taxable at that point.

Megabackdoor means Taxed funds put into a 401(k) as Basis, then moved to the Roth 401(k) with no tax consequence.

So, which is it:

This is on the W2 as pre-tax, and the pre-tax from two W2 exceeds the employee limit.

Or,

This is a post-tax amount, and was a megabackdoor contribution.