When calculating MAGI for Roth IRA purposes, AGI is reduced by Roth conversions. Is it also reduced by in-plan Roth rollovers (Code G)?

[LizW]

My client made a Roth IRA contribution, and it looks like it's an excess contribution.  Her spouse did an in-plan Roth rollover.  If he had done rollover to his Roth IRA, it would have reduced AGI and her Roth contribution would be allowed.  Since he did the in-plan Roth rollover, it is pushing their income above the upper limit.  Is this correct?

[Accountant-Man]

A ROTH conversion creates taxable income, but it adjusted out for ROTH allowance(so you say, and I believe you).

A ROTH rollover doesn't create taxable income, so why does it create ANY income?

[LizW]

An "In Plan Roth Rollover" from Traditional to Roth is taxable and reported with code G.

[qbteachmt]

"Rollover" for type to type, is not taxable and not reportable. Example: 401(k) to Trad IRA, or Roth 401(k) to Roth IRA.

Anything that changes the nature of the funds is a taxable conversion. 401(k) to Roth IRA or Roth 401(k), for instance. Trad to Roth is a taxable conversion.

Rollovers (like to like) that miss the deadline are failed rollovers, and would be taxable for sheltered account types.

And once someone creates more taxable income, that would affect all other eligibility such as Roth contributions, credits that are AGI or MAGI limited.

[LizW]

I agree it's a conversion (Traditional to Roth), but the following language comes from IRS Instructions for 2023 1099-R (page 5):

For a direct rollover of a distribution from a section 401(k)
plan, a section 403(b) plan, or a governmental section 457(b)
plan to a designated Roth account in the same plan, enter
the amount rolled over in box 1, the taxable amount in
box 2a, and any basis recovery amount in box 5. Use Code
G in box 7.

While the nature of the funds changed and the transaction is fully taxable, it is reported on the 1099 as a "rollover" as described above.  Code G, not Code 7 in box 7.

The question I had was relative to the calculation of the Roth IRA contribution limit based on AGI minus Roth conversions (and other adds/subtracts that don't apply in this case).  Since this conversion was in-plan, it appears it does not reduce AGI.  If the conversion can't be subtracted from AGI, they are over the limit for making a Roth contribution.  At first, I thought I must have entered it in the software incorrectly, but sadly looks like the software is accurate and they will not be able to make Roth contributions for 2022.

[rbynaker]

Not something I've run across before and I didn't dig too deeply.  It looks like IRC 408A uses a modified AGI that specifically excludes the income from Roth IRA conversions with no mention of excluding non-IRA qualified plans.  Live and learn.  Caveat: I did NOT follow into IRC 219(g)(3) to see what the other modifications were.

There was probably a better way for the client to do this.  So far all of the in-plan conversions I've seen (that, for confusing reasons, the IRS does refer to as both conversions and rollovers depending on where you look) have been conversions of after-tax contributions to Roth.  Big Tech (Google, Microsoft, etc.) have "Mega Backdoor" plans that permit after-tax contributions above the 401(k) threshold and they have an "automatic conversion" option that immediately converts these to Roth.  So the box 1 amount equals box 5 with 2a as $0 (prior to automatic conversions I would see small variances for <$5 interest each year).

But in your case I assume your box 5 is $0?  It sounds like this was a pre-tax 401(k) amount that was converted.  (Or rolled over.  Rollovered?)

The client can probably have the Roth IRA custodian do a recharacterization (to Traditional IRA) of the excess contribution.  If there aren't any other IRAs, this could be what I'd call a "delayed" back-door IRA, probably with a little bit of earnings.  So non-deductible contribution on the 2022 tax return and Roth conversion on the 2023 tax return.  But back-doors don't work if there are any other non-Roth flavored IRAs.  If recharacterization doesn't make sense, you're left with a corrective distribution (or paying the excise tax and kicking the can down the road).

Rick

[rbynaker]

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@Accountant-Man wrote:

A ROTH conversion creates taxable income, but it adjusted out for ROTH allowance(so you say, and I believe you).

A ROTH rollover doesn't create taxable income, so why does it create ANY income?

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Unfortunately Congress originally used the term "rollover contribution" in IRC 408A to describe what we refer to today as a Roth IRA conversion.  So both terms are correct (even if one is clearly misleading and confusing!)  The IRS uses both terms at different places on their website and in publications.

[qbteachmt]

"The question I had was relative to the calculation of the Roth IRA contribution limit based on AGI minus Roth conversions (and other adds/subtracts that don't apply in this case)."

Did you use Pub 590-A? It has a worksheet, let me look:

Worksheet 2-1. Modified Adjusted Gross Income for Roth IRA Purposes

Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes.