Roth 401(k) Rollover & 5 Year Rule
Person has Roth 401(k) option at former job and now intends to rollover balance either to new employer Roth 401(k) or to Roth IRA. How does either choice interact with the 5 year rule, if at all?
Thanks
Person has Roth 401(k) option at former job and now intends to rollover balance either to new employer Roth 401(k) or to Roth IRA. How does either choice interact with the 5 year rule, if at all?
Thanks
Permalink Submitted by Alan - IRA critic on Sat, 2015-11-21 00:00
If a direct rollover from the older Roth 401k plan is made to the new plan, the 5 year holding period in the new plan adopts the first year of contributions to the old plan. If made to a Roth IRA instead, the Roth IRA holding period governs, and the amount of contributions made to the Roth 401k is treated as regular Roth IRA contributions (even if that amount is larger than the direct rollover due to investment losses. It is probably better to roll to a Roth IRA since a Roth IRA has more favorable tax rules on non qualified distributions (ordering rules), and the accounting does not depend on communication between two different employer plans as to the year of the first contribution. The Roth IRA is also readily available if a distribution is needed.