5 year clock for 401k Roth and Pretax dollars converted to Roth IRA

Submitted by Pamela Poker-Meichtry on Wed, 2024-09-25 16:15

In 2024, I completed an inservice 401k rollover conversion directly to an existing Roth IRA. I am age 67. A portion of money that was converted was a Roth 401k that had been held in the Roth 401k for less than 1 year. The remaining portion of the the 401k money was Pretax money that the contributions/earnings had occurred over the last 10 years. All money was converted to the same Roth IRA that has been held for 4 years. Taxes were paid on the Pretax 401k converted amount as an estimated payment from savings account. I would like clarification about when the converted amounts can be distributed from the Roth IRA without additional taxation given I am age 67.
1. As it relates to the Pretax 401k earnings and contributions converted to the 4 year old Roth IRA:
a. When can the contributions and earnings be withdrawn from the Roth IRA without any tax implications? Is there a 5 year clock for either of the converted 401k contributions or earnings? If so, when does the 5 year clock begin?
2. As it related to the Roth 401k earnings and contributions converted to the 4 year old Roth IRA:
a. When can the contributions and earnings be withdrawn from the Roth IRA without any tax implications? Is there a 5 year clock for either of the converted 401k contributions or earnings? If so, when does the 5 year clock begin?



Submitted by Alan - IRA critic on Wed, 2024-09-25 17:07

If your first Roth IRA contribution was in 2020, your Roth IRA will be qualified on 1/1/2025 including all the money rolled into it from the pre tax and Roth 401k plans. The applicable clock is that 5 year Roth IRA clock which is completed on 1/1/2025. That’s only 3 months to wait for a distribution which not only will be tax free regardless of amount, but you will not have to complete Form 8606 which requires entering your Roth IRA basis amounts.

But let’s say you could not wait 3 months and needed to take a distribution before year end. All amounts would be non taxable except for earnings generated in your Roth IRA since 2020 and earnings generated on your Roth 401k contributions during the year you held the Roth 401k. That means most of the Roth IRA balance would be available tax free up to your contributions total to all plans. Only the gains would be subject to tax, but you would have to complete the 8606 to show the breakdown of your basis.

If 2020 was not the first year you made a Roth IRA contribution, please advise.

Submitted by Pamela Poker-Meichtry on Wed, 2024-09-25 18:45

My first Roth IRA contribution was in 2021 and will suffice the 5 year rule in January 2026.  My 401k roth contributions was in 2024.  My Pretax 401k contributions have been every year for 10 years.

Are you saying that the 5 year rule that applies to both the Roth 401k and the Pre-tax 401k is whatever the Roth IRA 5 year rule is(first contribution in 2021)?  Therefore, the earning would not be taxable as of January 2026?  The contributions for the Roth 401k and the Pre-tax 401k converted dollars can be taken out anytime tax free?  So the Roth 401k and the Pre-tax 401k earnings take on the same 5 year rule(the Roth IRA 5 year clock)?

Submitted by Alan - IRA critic on Wed, 2024-09-25 19:20

Correct. The entire Roth IRA will be qualified and tax free in 2026.

Before 2026, your Roth IRA basis of regular contributions is the amount you originally contributed as regular Roth IRA contributions plus the amount you contributed to the Roth 401k (this figure will show up on line 5 of the H coded 1099R for the direct rollover. Your conversion basis is the amount you rolled over from the pre tax 401k (shown on the G coded 1099R for the direct rollover.) All these amounts can be withdrawn anytime tax free, but must be reported on Form 8606. That leaves only the gains generated in your Roth IRA plus the gain generated in the Roth 401k as amounts that would be taxable if withdrawn prior to 2026. These gains come out LAST, only after the other amounts have already been distributed.

The holding period for the Roth 401k cannot be added to the Roth IRA holding period.

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