Roth 401K and Roth IRA
My employer offers a Traditional 401K and a Roth 401K. I was informed that the Roth 401k functions like a Roth IRA in that it is funded with Post-Tax dallars and all earning and principle will be distributed tax free upon retirement (i.e. 59.5). The only difference is that the Roth 401k adheres to minimum distribution requirement (similar to Traditional IRA). My question is this: Since Roth 401K can be rollover to a Roth IRA when the employee departs from the company, if I rollover my entire Roth 401K balance to a Roth IRA account, does that mean the roll over balance will no longer need to adhere to the minimum distribution requirement? I appreciate the help and the advice.
Sincerely,
Gregg
Permalink Submitted by Alan Spross on Sat, 2011-05-07 01:21
Gregg,
Yes, if you roll your Roth 401k over to a Roth IRA before the year your turn 70.5, RMDs will be avoided on the Roth 401k funds.
Meanwhile, there are other differences between the two accounts. For the Roth 401k:
1) Non qualified distributions include pro rated earnings. The contributions do not come out first and the earnings last like those of a Roth IRA
2) Roth 401k contributions cannot be recharacterized to pre tax contributions; in plan Roth conversions cannot be recharacterized back to the pre tax account; so once you make a Roth 401k contribution, that election cannot be changed for the funds already contributed. Of course, most plans let you change your allocation for future contributions.
Note that any company matching contributions must be made only to the pre tax account, so the earnings in your Roth 401k are limited to gains on your actual contributions. Starting last year many plans are allowed to offer you in plan Roth conversions from the pre tax to the Roth account.
If you work beyond age 70.5, the RMDs for the Roth 401k are postponed until after you separate from service.
Permalink Submitted by Gregory Soloman on Sat, 2011-05-07 02:36
Thank you so much!
Gregg