Roth 401k rollover

Submitted by MIKE KRUCHTEN on Mon, 2018-02-05 15:22

Please clarify the logistics of a NQ Roth 401k rollover via my example below. I have posted on this many times over past 2 years but seem to still be confused.

Client contributed to Roth 401k for past 7 years. Total Roth 401k contributions are $100,000 and earnings are $50,000. Client separates from employer at age 50, I realize the Roth 401k Rollover will be coded as NQ since he was not 59.5. However, I’m led to believe the plan may cut 2 checks; 1 for contributions and 1 for earnings but both eligible to be rolled over to Roth IRA. Also some plans(my experience) don’t cut 2 checks only 1 but break down the contributions/earnings on tax form.

I encourage anyone who contributes to a Roth 401K to also open a Roth IRA to start the 5 year clock.

I thought I read on this forum that the earnings would need to be rolled into Trad IRA not Roth if NQ. I don’t think this is correct and believe it may have been a question to forum and not the correct answer.



Submitted by Alan - IRA critic on Mon, 2018-02-05 17:05

  • You may be thinking about rollovers of after tax contributions and their earnings to a Roth IRA with respect to the two check issue. With a Roth 401k rollover to Roth IRA, there should be only one check issued since ALL must go to the Roth IRA. For this NQ Roth 401k balance of 150k, the 100k of basis (amount contributed to Roth 401k) will be shown in Box 5 of the 1099R. If the 100k was all from elective deferrals to the Roth 401k, this amount will be treated in the Roth IRA the same as regular Roth IRA contributions, so it increases the Roth IRA regular contribution basis which can be distributed tax and penalty free anytime. However, the 50k of earnings are treated as Roth IRA earnings and will be subject to tax and penalty if distributed from the Roth IRA before it is qualified.
  • Note that IF the Roth 401k had been qualified, then the entire amount rolled over would be treated as regular Roth IRA contributions in the Roth IRA.
  • Now if the 100k of Roth 401k contributions included in plan Roth rollovers (IRRs), then the amount of the IRRs would be treated as Roth IRA conversion basis and subject to the 5 year holding period to avoid a 10% penalty if distributed before the 5 years as completed. Same treatment as a Roth IRA conversion.

Submitted by David Mertz on Mon, 2018-02-05 18:17

  • I can see that two checks might be issued if one intended only a partial rollover of the total distributed from the Roth 401(k).  The rollover consists first of the portion that would be taxable if not rolled over (earnings), so one might ask the plan to split the distribution into a check in the amount of the earnings, made payable to the receiving IRA as a direct rollover so that no tax withholding is required, and the second check made payable to the participant for the portion that is not taxable (original contributions).  More often, though, one would simply roll the entire distribution over to the Roth IRA and then take a distribution from the Roth IRA consisting of the original contributions … far less room for error that way.
  • If someone is rolling over the Roth 401(k) account, it’s usually the case that they are rolling over the traditional account in the 401(k) as well (usually to a traditional IRA, but also possibly as a taxable rollover to a Roth IRA), so this could be the reason for two checks.

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