Roth 401(k) and 5 year rule
I am 30 years old and have contributed funds to my Roth 401(k) for the past 4 years. I am now separated from service and am considering rolling the Roth 401(k) into my Roth IRA. At what point is the basis of my Roth 401(k) rollover available for penalty free withdrawal from the Roth IRA?
Is it available immediately? Is it available after a new five year waiting period or just one more year since I started the Roth 401(k) 4 years ago?
From a liquidity standpoint might it be better to leave the funds in the 401(k) one more year to complete the five years prior to rolling over the funds?
Permalink Submitted by Alan - IRA critic on Fri, 2016-08-26 19:26
There is no benefit to keeping the Roth 401k in place. When you roll it into your Roth IRA the amount of your contributions made to the Roth 401k will be treated as additional regular Roth IRA contributions which you can withdraw anytime without tax or penalty. Any earnings in your Roth 401k will be treated as if they were Roth IRA earnings, and the earnings will not become tax and penalty free until you reach 59.5. Therefore, you need to keep track of your Roth IRA contribution amounts from Day 1 and also keep a copy of your final Roth 401k statement which indicates the amount of your Roth 401k contributions so you will be able to report any Roth IRA distributions on Form 8606.