When someone loses their job (or retires) after age 55, but before reaching 59.5, I know they access to their pre-tax amount without paying a 10% penalty (just ordinary income rates). If there is Roth funds in the account, they still have to wait until 59.5 for the Roth gains to be tax-free, correct?
Great advice. Once the Roth 401k is rolled over to the Roth IRA, and if only the after-tax funds are distributed, how do you prove to the IRS how much the after-tax amount was? Would it be on the 1099-R from the 401k?
Yes, it would be shown in Box 5 of the 1099R coded H. Note that it is highly unlikely that the IRS would request such documentation, but a copy of the 1099R would provide it.
The box 5 amount would be entered on line 22 of the Form 8606, but if the Roth IRA already held regular Roth contributions, those amounts would be combined with the Box 5 amount and entered on line 22 of the 8606.
Permalink Submitted by Alan - IRA critic on Fri, 2024-10-11 22:44
Correct. A non qualified Roth 401k distribution will be pro rated between contributions and earnings, and the earnings will be taxable. To avoid these taxes a direct rollover to a Roth IRA is advised because Roth IRA distributions are subject to the Roth IRA ordering rules, and those taxable earnings come out last instead of pro rata.
If a large enough Roth IRA distribution is taken before it is qualified and includes taxable earnings, the penalty will also apply prior to 59.5, but that appears to be less of a problem than a distribution from the Roth 401k will include some earnings with all distributions.