Roth 401k rollover to Roth IRA pre age 591/2 distribution from Roth IRA
I have a client who had $200,000 in a Roth 401k at her old employer. She is rolling it over to a Roth IRA. Her basis in the Roth 401k is $100,000 and it has $100,000 in earnings. She is age 50. If she takes money out of the basis in the Roth IRA, what are the tax consequences? She doesn’t have any other Roth IRA. I have been told she doesn’t have to pay tax on the basis. I have also been told she will have to pay 10% penalty because she hasn’t held the Roth IRA for 5 years. I need to have the 100% correct answer.
Permalink Submitted by Alan - IRA critic on Thu, 2019-05-23 21:07
The 100,000 of Roth 401k basis is treated as Roth IRA regular contribution basis once in the Roth IRA. Therefore, that 100,000 can be withdrawn without tax or penalty from the Roth IRA under the Roth IRA ordering rules. However, note that if the Roth 401k as funded by an IRR (in plan Roth rollover), it will be treated as Roth IRA conversion basis instead of regular contribution basis, so would be subject to penalty if withdrawn within 5 years of the year of the original IRR. Some clients will have Roth 401k basis consisting of a combination of elective deferrals and IRRs. In such a case, the Roth IRA would also have both regular and conversion basis figures with the conversion portion coming out last but subject to the 10% penalty for 5 years from the IRR year. Client should keep the 1099R from the Roth 401k showing the basis.