Roth 401k Rollover

Submitted by MIKE KRUCHTEN on Fri, 2017-02-24 10:45

Question 1

I have a client who just retired at age 58 and will begin starting 401k monthly redemptions next month to get benefit of age 55 exemption. The plan has a value of approx 700k, 100k of which is Roth assets. The plan document doesn’t explain the withdrawal ratio nor could phone rep add any value. Since the client is not yet 59.5 any Roth 401k distribution would be coded as NQ and would prefer to have no Roth 401k portion paid out as portion of his monthly request. I don’t know if he can request the Trad 401k portion only as his monthly draw or plan must payout as pro rata.

I’m aware of the rules on a Roth 401k rollover but since he will not be requesting a rollover from any plan assets rather an ongoing monthly draw until he hits age 59.5 confused about his options since plan document nor customer service center added no value to our question.

Question 2 (assumes rollovers are requested first then monthly 401k redemptions occur)

My grand hope would to rollover the full Roth 401K portion(100k) to his existing Roth IRA thou the 1099R would be coded as NQ. However, at 59.5 since his Roth IRA was opened 7 years ago these proceeds would then be tax free. Then rollover a portion of his Trad 401k balance(approx 500k) to a TIRA leaving 100k in 401k to bridge his cash need until age 59.5. If my hope is allowed from IRS perspective then by plan would this be looked at as a partial Roth rollover triggering the pro rata division but if so does it matter if all the Roth portion even thou prorated would be rolled to Roth IRA.

I realize I have many questions in this post but felt adding full scenario in one post vs. creating many posts would be best.



Submitted by Alan - IRA critic on Fri, 2017-02-24 17:12

  • Many plans will allow distributions after separation from either the pre tax or Roth accounts, but others including the TSP require that distributions be pro rated between the two portions of the plan. I would think that if monthly distributions are required to be pro rated, so would any additional distributions. Any direct rollovers would also likely be pro rated, so the Roth portion could probably not be rolled to a Roth IRA leaving only the pre tax portion in the plan to fund the monthly withdrawals. All these details would have to be determined from the plan document or informed plan staff.
  • If the Roth 401k could be rolled out by itself, the Roth IRA ordering rules would apply until the Roth IRA was qualified at 59.5. As for the 401k rollover options, the plan document determines how broad these options are, not the IRS. The IRS states what the broadest options are, but plans are free to place restrictions on them, even to the point of requiring a full distribution or nothing after separation.
  • Assuming the plan requires all distributions to be pro rated. Since around 14% of the plan is Roth, if that Roth included 20% as earnings, then only 3% of each distribution would be Roth taxable earnings. Because amounts the client would indirectly roll over to their Roth IRA are considered to come first from the taxable earnings, they could do a small rollover of 20% of the Roth portion of the distribution and avoid tax on the earnings. Of course that would require 12 small rollovers each year until the entire plan balance was rolled over. In order to do this, client must know exactly what portion of the plan is being distributed in the monthly payments. Remember that there will be mandatory federal withholding of 20%, but for the Roth portion it should only be applied to the earnings. I assume that client has not done any IRRs (in plan Roth rollovers) to the Roth 401k.

Submitted by MIKE KRUCHTEN on Sat, 2017-02-25 11:47

Alan, thank you for the very useful information.I and the client spoke with the plan administrator yesterday and he confirmed client could perform a full Roth 401k Rollover, partial Trad 401k rollover leaving only Trad 401k funds to bridge client to 59.5. The plan document is very vague in relation to distribution order so we have to assume infomration from admin on a recorded line is accurate. With this said and assuming its accurate, I assume client will get a 1099R for Roth 401k rollover which will breakdown Roth 401k start date and after tax contributions, a 1099R for partial Trad 401K rollover and another 1099R for any monthly drawls from Trad 401k. Does TD 9769 come into play here? Rollover requests will be requested on same day but since some funds are being left in plan, the plan could state no and everything was done via pro rata which would be contradict verbal information provided to us. This particular case would not be hurt that bad by misinformation (facts from admin vs. tax forms). However I had some prior dealing with this 3rd party admin and not confident in the infomration being provided and a very vague plan document provides no back up. Seems in the end the plans tax documents(1099R) are final since they can fall back on “legal language”.With this said, since the client is 58 I’m leaning on leaving no funds within plan. Client will receive funds he believes he will need to bridge him for 16 months from plan now and rollover remainder to his IRA. Also rollover 100% of his Roth 401k to existing Roth IRA. He has many other non retirement assets to tap but since his income will be low this year we want to take advantage of current low Fed tax rates therefore using some qualified funds. My thought behind this was all transactions would be requested in 1 day ensuring TD 9769 was used for Roth 401K Rollover but feel in the end the plan admin still can apply pro rata.  

Submitted by Alan - IRA critic on Sat, 2017-02-25 21:22

  • Client apparently does not have any after tax contributions within the pre tax 401k, and for the Roth 401k the entire balance will go with the direct rollover to the Roth IRA. Therefore, neither 2014-54 or TD 9769 should apply here. The only thing that could go wrong would be if the plan somehow requires that the amount to be distributed to the client must include a pro rated amount of Roth and pre tax balances. One way to flush that out is to make the first request a direct rollover of the entire Roth 401k balance to the Roth IRA. Once that is done, any 1099R problems should be eliminated. But if the plan balks at doing the Roth direct rollover by itself, it will have flushed out the potential problem up front. Then back to the drawing board.
  • To further clarify the two notices, Notice 2014-54 did not deal with designated Roth accounts, only with the pre tax account and any basis in an after tax sub account. Then TD 9769 was issued to extend the rationale stated in 2014-54 to Designated Roth accounts so that if a Roth direct rollover was done along with a distribution to the participant requested at the same time, they were not considered separate distributions under which Roth earnings would be included in both portions. So neither of these notices address what the client intends to do and therefore there is no need to consolidate the rollovers and distributions to client into a single request.

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