direct rollover from 401(k) to Roth IRA

Submitted by Michael Porfido on Wed, 2016-01-20 23:53

Are there any restrictions in taking out money from a Roth IRA that is funded from a direct rollover? Does the 5 year rule apply? The client is over 59 1/2

Thank you



Submitted by Alan - IRA critic on Thu, 2016-01-21 00:47

  • A pre tax 401k to Roth IRA rollover invokes the usual two 5 year requirements. The one you are probably referring to is the 5 year holding period for conversions. This requirement ceases at age 59.5 so there will be no 10% penalty for tapping such contributions after 59.5.  The other 5 year requirement is for the Roth IRA to become qualified along with reaching 59.5. If the Roth IRA is already qualified because it was started prior to 2012, then the funds rolled over from the pre tax 401k are also fully qualified. However, if the pre tax 401k rollover is the first Roth IRA contribution of any type, then any earnings generated in the Roth IRA will not be tax free if withdrawn before 5 years have passed. Even that should not be a problem because the earnings would come out last.
  • Or are you asking about a Roth 401k to Roth IRA rollover, especially when the Roth 401k received an in plan Roth rollover prior to the Roth IRA rollover?  This presents a different set of considerations.

Submitted by [email protected] on Tue, 2016-02-09 01:03

my client will be doing a sizable direct rollover into a Roth IRA from his companies’ profit sharing/401(k) plan. I am just wondering if I should be aware of anything regarding taxes that might come into play. His income already puts him in the highest bracket so the fact that this will be a taxable distribution will not put him in a higher bracket.Does the 5 year period start from when the Roth IRA is opened or when the money is rolled over? 

Submitted by Alan - IRA critic on Tue, 2016-02-09 01:19

The 5 year period for the Roth to become qualified starts with 1/1 of the year the first allowed contribution (not an excess contribution) is made to any Roth IRA client owns. The other 5 year holding period for conversions applies to this qualified rollover contribution and starts on 1/1 of the year this rollover is done. This holding period is required to avoid a 10% penalty if the client withdraws this rollover before 5 years AND before 59.5. Also, note that if the rollover loses money or client does not want to pay the taxes on it, he can recharacterize the rollover to a TIRA in the same manner as an IRA conversion can be recharacterized. This must be done by the usual deadline.

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