ROTH Basis – IRA vs 401k
If a client has a $100,000.00 401k, of which $30,000.00 is designated ROTH with a basis of $20,000.00, can the client do a 100% rollover, cash out just the basis and rollover the earnings? Or will there a prorated earnings/basis calculation? If the client can not withdrawal the basis directly from the 401k, can they rollover 100% of the ROTH source to a ROTH IRA and just withdrawal the basis at that point? Client is 48, no early withdrawal exceptions. Thank you!
Permalink Submitted by Alan - IRA critic on Thu, 2024-11-07 15:30
Client will probably have to be separated from service to withdraw from the 401k. If so, and client was able to take a 30,000 designated Roth distribution, 20% of the gain would be withheld (2000), and client could do a 60 day rollover of 10,000 to a Roth IRA. Rollover rules state that the first dollars rolled over are the gains, and therefore the distribution would be non taxable, although 2000 will be sent to the IRS as withholding.
To avoid that, if the entire Roth IRA balance was rolled over to a Roth IRA directly, 20,000 would be treated as Roth IRA regular contribution basis and could be withdrawn any time tax and penalty free. That avoids the withholding issue.