“Are refunds of an excess Roth 403(b) deferral handled the same way as an excess deferral to a traditional pre-tax 403(b)? If not, what are the differences?”
Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
Good question! Generally, excess pre-tax and Roth deferrals are subject to the same tax treatment, with the timing of the return of the excess deferral determining when and the extent to which the excess is taxed:
- If the excess deferrals and the related earnings are distributed in the same calendar year in which the deferral was made, both the deferral and earnings are taxable in that year.
- If the excess deferrals are withdrawn in the next calendar year, but by April 15, the deferrals are taxable solely in the calendar year contributed, while the earnings through the date of distribution are taxable in the year distributed. There is no 10% early distribution tax, 20% income tax withholding or spousal consent requirement on amounts distributed by this date.
- If the excess deferrals aren’t withdrawn by April 15 of the calendar following the year of the deferral, the excess deferrals are subject to double taxation—both in the year contributed and in the year distributed—and could be subject to the 10% early distribution tax, 20% income tax withholding and spousal consent requirements. As in other cases, the earnings through the date of distribution are taxed in the year distributed.
All of that said, there are some nuances with respect to reporting when all or a part of the distribution consists of Roth amounts, which you should discuss with your retirement plan counsel.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
« TRIVIAL PURSUITS: From Where Does the Word Trivia Come?