401k conversion to Roth

Submitted by jack capron on Fri, 2019-05-17 14:43

Here is a scenario – a 35 year old converts say $100,000 from traditional 401k to Roth 401k. After 5 years- 1. Will the 10% penalty apply to entire amount if not a qualified distribution? 2 Will the Penalty only apply to the earnings portion? 3. If the individual leaves the current employer after 5 years and rolls the Roth portion to a Roth IRA will he qualify to withdraw with no penalty?



Submitted by Alan - IRA critic on Fri, 2019-05-17 15:47

  • After 5 years from an IRR, there is no penalty on distributions attributed to the IRR, but earnings will be subject to tax and penalty. Earnings are distributed pro rata with contributions as a Roth 401k does NOT follow the more favorable Roth IRA ordering rules for distributions.
  • If a non qualified Roth 401k is rolled into a non qualified Roth IRA, the amount of Roth 401k elective deferrals is treated as regular Roth IRA contributions. IRRs to the Roth 401k are treated as Roth IRA conversions after a rollover to the Roth IRA. The 5 year holding period for an IRR or conversion runs continuously in the both Roth accounts until satisfied. Once satisfied, this money in the Roth IRA can be withdrawn without tax or penalty. Therefore, once a rollover is done from a Roth 401k to Roth IRA, the Roth IRA accounting must be updated to incorporate the rollover funds into the correct Roth IRA category. Finally, note that any 10% penalty for an IRR distributed in less than 5 years will only apply to the taxable portion of the IRR, so if the IRR is done with non Roth after tax contributions made to the 401k, the IRR is mostly non taxable and the penalty would not apply to non taxable IRR amounts even if distributed in under 5 years.

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