Confused on Roth 401k Basis when rolled over to Roth IRA

Submitted by Jon Steffen on Tue, 2019-03-05 23:04

I know there’s an ordering hiearchy to taking money from a Roth IRA. Contributions, conversions then growth, but where I get confused and can’t locate an answer is, what happens with a designated roth account from a 401k when I roll it over to the roth IRA? Does any of that become basis and accessible before age 59.5 without penalty?

In my example, lets say John never contributed to a roth IRA, but he contributed $5,000 to his designated roth account 401k, and its grown to $6,000. The company also matched $5,000 to the pre-tax 401k account and that also grew to $6,000.
John severs employment, and does a rollover of roth 401k to a new roth ira on 1/1/19, and also a direct rollover of the pre-tax 401k dollars to a TIRA.

5 years from 1/1/19 John wants to pull out money from his Roth IRA that has now grown to $9,000. How much can he pull out tax free? How much can he pull out tax and penalty free?



Submitted by Jon Steffen on Tue, 2019-03-05 23:05

oh, and lets say john was 45 when he severed employment

Submitted by Jon Steffen on Tue, 2019-03-05 23:14

and john started contributing to his roth 401k on 1/1/2013

Submitted by Alan - IRA critic on Tue, 2019-03-05 23:29

  • The Roth IRA balance will not be qualified until he reaches 59.5. Prior to then, if a Roth IRA distribution is taken, the first 5000 is treated as a regular Roth IRA contribution and can be distributed without tax or penalty anytime. Amount withdrawn in excess of 5000 will be Roth IRA earnings, whether earned in the Roth 401k or later in the Roth IRA. Tax and penalty will apply to these amounts up to age 59.5. Distributions must be reported on Form 8606. On that form, regular Roth basis goes on line 22 and will be 5000. This basis is also shown in Box 5 of the 1099R issued to report the direct rollover from the Roth 401k to the Roth IRA. Amounts in excess of 5000 will be taxable as shown on Form 8606. 
  • Basically, what happens in a Roth 401k rollover is that Roth 401k basis is transferred to the Roth IRA to be distributed under the ordering rules. Accounting responsibility falls on the 401k administrator until the rollover and then falls on the Roth IRA owner to track the composition of his Roth IRA. If he already had a Roth IRA, the basis rolled in from the Roth 401k is integrated with his Roth IRA basis. The distribution reporting becomes more complex when conversions are included or in plan Roth rollovers within the Roth 401k from the pre tax account. The taxable portion of these conversions must be held 5 years to avoid a 10% penalty if distributed sooner. In the Roth IRA regular contribution basis goes on line 22 and conversion basis goes on line 24.

Submitted by Jon Steffen on Tue, 2019-03-05 23:35

If Jane does an In Plan Roth Rollover in 2018 and also does a Roth IRA conversion of other TIRA funds in 2018, and then  in 2019 Jane rolls her roth 401k into her roth ira.  Do you aggregate the IRR and the 2018 Roth conversion for 2018 conversion basis?

Submitted by Jon Steffen on Thu, 2019-03-07 14:41

Can you comment on Jane?

Submitted by Alan - IRA critic on Thu, 2019-03-07 16:14

Yes, the IRR and Roth conversion amounts are aggregated as conversion basis. The total taxable amount of each of those conversions are added together, and if any of those amounts are distributed from the Roth IRA, the taxable portions come out first. This affects determination of the 10% recapture tax if these amounts are distributed prior to 2023.

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