Excess Roth Deferral with Losses

[Vlad401k]

We have a participant who exceeded the 402(g) limit with Roth deferrals. He also had losses on the contributions. How should this distribution be reported on 1099-R? As I understand it, code "PB" must be used, but how do the losses come into play?

Let's say the participant made $50,000 for the 2015 calendar year. He contributed $19,000 in Roth Deferrals. $1,000 of that must be refunded back to him and there were losses of $100 on that amount.

So, he'll receive a check for $900 in this year (2016) coded as "PB". The way I see it is that he'll pay taxes on the entire $50,000 for this year and the losses are irrelevant (they would be relevant had it been excess of normal pre-tax deferrals).

Am I looking at this the correct way?

[Lou S.]

I think the 1099-R would be for $1,000. Though it is all recovery of basis for 2015 so a non-taxable event.

The $100 loss is "received" in 2016 and would be a deduction on the 2016 tax return. Line 21 of the 1040 if I recall the discussion from last week correctly.

[Vlad401k]

Lou,

Please help me follow your line of thought. We can both agree that the check amount will be for $900, right? If that's the case, shouldn't the 1099-R reflect $900 as the distribution amount (and $0 as the taxable amount, as it's a Roth distribution? How could you code $1,000 on 1099-R?

Also, I understand what you're saying about the loss as being applicable to 2016 and is normally used to reduce income for regular (pre-tax) deferrals. However, since it's an excess Roth Deferral, the whole deduction of taxes on 2016 tax return wouldn't apply, right? Or am I missing something?

[Tom Poje]

when in doubt, look at the 1099r instructions, and well, decide for yourself what they mean!

Losses. If a corrective distribution of an excess deferral is made in a year after the year of deferral and a net loss has been allocated to the excess deferral, report the corrective distribution amount in boxes 1 and 2a of Form 1099-R for the year of the distribution with the appropriate distribution code in box 7. If the excess deferrals consist of designated Roth contributions, report the corrective distribution amount in box 1, 0 (zero) in box 2a, and the appropriate distribution code in box 7.
However, taxpayers must include the total amount of the excess deferral (unadjusted for loss) in income in the year of deferral (I think that statement must only apply to non-Roth) , and they may (apparently you have an option? which year to report this?) )report a loss on the tax return for the year the corrective distribution is made.

Publication 525 (2015) adds the following

Excess distributed to you. If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, do not include it in income again in the year you receive it. If you receive it later, you must include it in income in both the year of the deferral and the year you receive it. Any income on the excess deferral taken out is taxable in the tax year in which you take it out. If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income. You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. Use the following rules to report a corrective distribution shown on Form 1099-R for 2015. If the distribution was for a 2015 excess deferral, your Form 1099-R should have the code “8” in box 7. Add the excess deferral amount to your wages on your 2015 tax return. If the distribution was for a 2015 excess deferral to a designated Roth account, your Form 1099-R should have code “B” in box 7. Do not add this amount to your wages on your 2015 return

Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Form 1040, line 21 and identify it as “Loss on Excess Deferral Distribution.”

edited to add comments from publication 525

[Vlad401k]

Tom,

Thanks for posting the 1099-R guidance here. As this appears to be a rather rare case (most of what I see posted in the publication is based on regular (pre-tax) deferrals, would you agree that "deducting" losses on 2016 tax return doesn't make sense as it's a Roth account? Should there be just a check issued for $900 with code "BP" based on the example in the original post?

[Lou S.]

The loss on the ROTH is the same as the loss on traditional pre-tax contributions, the only difference is the ROTH returned excess contributions are 100% non-taxable return of basis as opposed to taxable income in the year deferred.