Roth conversion basic questions

Submitted by paul calvert on Sat, 2020-11-28 23:49

Tried to find simple answers to the following questions via Google, but not much luck.

1) Can one roll traditional IRA into a Roth 401K?

2) Does 5 yr holding period begin anew if I rollover a Roth IRA at company A to a new Roth account at company B?

3) Does 5 yr holding period begin anew if I rollover traditional IRA to a Roth IRA account that was opened and funded > 5 yrs ago?

My age is 57. My Roth IRA account was created & funded over 5 years ago. My 401K Roth account from a former employer was left at the original employer’s 401K company (Vanguard).

I do not want to restart a 5 yr waiting period if at all possible. My thought is convert traditional IRA at Vanguard to the Roth 401K at Vanguard (if IRS and former employer allow it). If not allowed, convert/rollover to already open/funded Roth IRA and possibly then move from the existing Roth to a newly created Roth account at a new investment company (Fidelity).

Do any of these actions reset the 5 yr clock? Or do they all (and there is no way to avoid clock reset happening?

Thanks!!



Submitted by Alan - IRA critic on Sun, 2020-11-29 00:26

  1. No. No type of IRA can be rolled into a Roth 401k.
  2. You cannot roll your Roth IRA to a Roth 401k, but if Company B holds a Roth IRA so you are moving a Roth IRA to a new Roth IRA custodian, the 5 year holding period does not reset. 
  3. No. But a new 5 year holding period begins for the conversion to be withdrawn without penalty prior to 59.5.
  4. Once you hit 59.5, your existing Roth IRA account becomes qualified ALONG WITH any rollovers from your Roth 401k or Roth conversions from a pre tax plan. Meanwhile, if you were to roll your Roth 401k into your Roth IRA now, your Roth 401k basis (your regular contributions or in plan Roth rollovers) is added to your Roth IRA basis. At 59.5 all the earnings rolled over from the Roth 401k and earnings generated in your Roth IRA become qualified.  Therefore, no 5 year holding period must start over, but you cannot use the 5 years your Roth 401k was held. Nonetheless, your Roth 401k is not yet qualified anyway, so you could not withdraw the earnings in the Roth 401k without tax prior to reaching 59.5. Further, if you DID need to tap your Roth 401k money before then, your earnings in that account would be distributed pro rata with the earnings subject to tax and penalty, but if you rolled your Roth 401k into your Roth IRA, the Roth IRA ordering rules govern and any earnings would come out last. You could therefore tap your Roth 401k basis (rolled into Roth IRA) without tax or penalty and that basis comes out first.  On balance, there is no reason NOT to do a direct rollover of your old Roth 401k to your Roth IRA.
  5. I expect that your old plan also includes a pre tax 401k balance, since any matching contributions made by the employer from your Roth contributions must be made to a pre tax account. You could either do a split rollover with the pre tax portion going to your TIRA and Roth 401k to your Roth IRA, or you could roll the entire plan to your Roth IRA, paying tax on the pre tax amount.

Submitted by paul calvert on Sun, 2020-11-29 01:05

First, thank you so much for the quick, detailed reply. You brought up some things I had forgotten (your point 5). Regarding that, can I convert the company match to Roth (in the same 401K roth account) or must I convert/rollover to a non-401K Roth? and if I have to move to a non-401K Roth, does this impact the 5 yr olding?Clarification on your answer for 2)– same question–but to clarify, there is no open Roth acct at company B. Does this change the answer?I am confused about the 5 yr hold with respect to age. If I convert to roth this year @ age 57, do I have to wait to age 62, or only 59.5 to avoid penalty? or is it 5 years AND over 59.5? This is more complex than I had hoped 😉 Thanks again!    

Submitted by Alan - IRA critic on Sun, 2020-11-29 01:36

  • Plans offering designated Roth accounts do not necessarily offer IRRs (in plan Roth conversions), or may not offer them to former employees. You would have to check with your former plan administrator. However, the old plan cannot deny a direct rollover (most plans will provide at least 2 (pre tax AND roth direct rollovers). You could then convert some part of the TIRA balance to your Roth IRA if you wanted.
  • By “non 401k Roth” I assume you refer to a Roth IRA. Moving a Roth IRA does not affect the holding period, but rolling over a Roth 401k forfeits the holding period for that account, although your basis becomes Roth IRA basis as explained above.
  • If Company B would be a new Roth account, it does not change the holding period established as the first year you contributed to ANY Roth IRA. That is true even if you liquidated all your Roth IRAs for a period of time. So you cannot lose the holding period you have already established and the years that will be added to it.
  • There are two separate 5 year holding periods for a Roth IRA. The first is measured from the year of your first Roth contribution (regular or conversion). This addresses WHEN your Roth IRA can be qualified with all earnings tax free, but you must ALSO either be 59.5 or disabled. Without the latter, the 5 years does not provide much of a benefit. You must have both the 5 years and age 59.5. The second 5 year applies to each year’s Roth conversions, which must be held to the earlier of 5 years or age 59.5 to avoid the 10% penalty on the taxable portion of the conversion. You are set to satisfy both holding periods upon reaching 59.5. Again, if you convert this year, you must only wait until 59.5 to avoid penalty. In 2.5 years your entire Roth IRA balance will be free of taxes or penalties should you need a distribution. You will also no longer need Form 8606 to report these distributions or need to track your Roth IRA basis.
  • In the meantime, if you roll over the Roth 401k to your Roth IRA, tracking your basis becomes your responsibility, for at least 2.5 years. You would have to integrate the Roth 401k accounting into your Roth IRA and determine your new Roth IRA basis after the rollover. For example, if your old Roth 401k holds 10k in contributions, and is worth 13k, your regular Roth IRA basis is increased by 10k after the rollover, which amount you can distribute tax and penalty free prior to 59.5.

Submitted by paul calvert on Sun, 2020-11-29 15:06

It seems like the simplest thing for me to do, over the next 2.5 years, is to leave my 401K Roth accts alone and focus on converting my TIRAs to Roth IRA (whether in a new Roth acct or an existing 5yr old acct) . Given that I have an established Roth acct over 5 years old, I will not need to worry about creating new Roth accounts at Vanguard (which the TIRAs reside with). If I understand alll you have said, I can focus on converting the company match amounts after I turn 59.5.  Is there an ideal mix of TIRA/Roth accounts to minimize taxes in retirement? I believe there must be–although I do not know how to determine what that mix may be as I am sure it must vary from case to case. I am being careful to not convert more, in any given year, than would put me in a higher (> 24%) tax bracket.

Submitted by Alan - IRA critic on Sun, 2020-11-29 16:12

While there are other less important factors, comparison of your known tax rate for conversions with your estimated marginal rate in retirement in the event you do not convert (and therefore your RMDs will be higher) is the main indicator. Conversions you can do at a lower rate or in some cases at the same rate would be beneficial, but conversions at a higher rate would not be.

Submitted by William Tuttle on Sun, 2020-11-29 16:56

There are only general/specific facts and circumstances to consider:

  • For most people, their marginal tax rates in retirement will be lower than in peak earning years.
  • The TCJA sunsets on 12/31/25. Ordinary income tax rates and many other tax considerations reset to those prior to the act.
  • The COVID-19 pandemic has blown a gaping hole in the federal budget. The total debt has skyrocketed.
  • Nothing to do with taxes is certain, but it is extremely likely Income tax rates will be higher in the future.
  • However, tax rates are not the only consideration. There are many AGI/MAGI phaseouts and downright cliffs. Where having Roth assets to control your AGI/MAGI is invaluable.
  • If you retire prior to age 65 and do not have retiree health benefits, you will be buying private health insurance. ACA premium subsidies decline with an increased MAGI until falling off a cliff at 400% of the FPL.
  • When you transition to Medicare, Part B and D premiums are subject to surcharges based on your MAGI.

Add new comment

Log in or register to post comments