Roth 403B Rollover to ROTH IRA Questions
Hi,
I had a few questions I am hoping you can answer.
1. ) Let’s say I have a ROTH 403B from 2 employers ago that was rolled to a ROTH 403B with a previous employer where it is now. Can I roll this over again but to a ROTH IRA this time? I’m think the answer is yes but want to confirm.
2.) Building on question 1. Assuming the Roth 403B is rolled into the Roth IRA. The Roth IRA already existed prior to rollover with contributions and was started in 2020 with the first contribution but I also have another ROTH IRA that was started with first contribution in 2018. For the rollover amount from the ROTH 403B does it just assume the 5 year rule that would apply to the Roth IRA?, which I think would be based on 2018 first ROTH IRA contribution across all my ROTH IRA accounts? or does it have its own that needs to be tracked for just the rollover amount?
3.) Building on the scenario in 1. and 2. let’s say the ROTH 403B at the time of rollover to the ROTH IRA has $20,000 in it of which $15,000 is contributions that were made to the ROTH 403B and the other $5,000 is earnings on those contributions. When the 403B is rolled over to the ROTH IRA, what amount of the rollover would be allowed to be withdrawn without penalty before 59.5 years old assuming 5 year rule is met on account? Would it be $0, $15,000, or the full $20,000.
Thanks.
Permalink Submitted by Alan - IRA critic on Thu, 2021-10-14 01:39
Yes, since the account is with a prior employer you can roll it to a Roth IRA. You probably have a pre tax 403b with the prior employer as well. It is possible that they could require you to roll over the pre tax portion as well to a TIRA account.
All your Roth IRAs are treated as having started when the first Roth contribution was made to any of them.
Since the Roth 403b is not yet qualified, only the 15,000 in contributions will be treated in your Roth IRA as regular Roth IRA contributions, available anytime without tax or penalty. This is true even if you had no prior Roth as there is no waiting period to withdraw regular contributions tax free. The earnings from the Roth 403 become Roth IRA earnings and you cannot withdraw them without tax and penalty until you are 59.5 and have had a Roth IRA 5 years. You will meet the 5 years in 2023.
The Roth IRA distribution ordering rules are more favorable than the pro rate distributions from a Roth 403b, where earnings would be a portion of any distribution. You must need to update your accounting for your Roth IRA basis at the time of the rollover. Your Roth IRA contribution basis will rise by 15,000.
Permalink Submitted by Steven Vitullo on Thu, 2021-10-14 14:16
Referencing your answer 1 above if the ROTH 403B account has no pretax or after tax contributions. 100% of the contributions are ROTH contributions. I am assuming if this is the case a TIRA is not used and it can just rolloer direct to a ROTH IRA.
Referencing your answer 3. Are all 403B plan not qualified? How would your answer be different if it was a 401K with pretax, aftertax, and Roth contributions in it?
Referencing your answer 4. Would this be different if the account was a 401K?
If you do a Direct rollover from a 401K of only after tax monies (contributions + earnings) to a ROTH IRA. The earing are taxable and the contributions would not be. Let’s say there is $20,000 of contributions and $10,000 of earnings. What amount would be counted as contributions to the ROTH IRA for early withdrawl purposes. Would it be $0, $20,000, or $30,000?
Permalink Submitted by Alan - IRA critic on Thu, 2021-10-14 16:19
Yes, having no pre tax 403b means you did not receive any matching contributions from the employer. If no pre tax, no need for TIRA as all with go the Roth IRA.
Your Roth 403b is not qualified until you have it 5 years and reach 59.5. I assumed yours is not qualified yet since you had a question related to not yet being 59.5. If you had those other types of contributions in the Roth 403b, you would roll the pre tax non Roth to a TIRA, and the Roth and other after tax to your Roth IRA.
Exactly the same if the plan was a 401k.
By “early withdrawal” I think you mean the 10% penalty if you are under 59.5. If the proposed rollover does not include any balance from a Roth 401k, then the entire 30,000 will be treated as if it was a conversion when you withdraw from the Roth IRA and would show on line 24 of Form 8606. But the portion subject to the 10% penalty would be 10,000, the taxable portion (earnings) of the rollover to Roth.
Permalink Submitted by Steven Vitullo on Thu, 2021-10-14 17:15
Thank you! Just need a bit more clarity on 4.
I think the rollover is a penalty free event regardless of age and none of this income counts toward AGI or MAGI?
So after I do the direct rollover and pay the tax on the taxable part, I could withdraw the $20,000 after tax part from the ROTH IRA without penalty or tax before age 59.5 but the other $10,000 even though converted to Roth would still incure the 10% penalty for early withdrawl but not be taxed?
I think IRS ROTH IRA withdrawl ordering requires Roth contributions to be taken first, then conversions so from the previous quesiton if I had $40,000 in contributions and then after that I would have to take the $10,000 part first before the $20,000, and then after that the earning on the ROTH IRA would be drawn last. Is that correct?
Permalink Submitted by Alan - IRA critic on Thu, 2021-10-14 20:06
Yes, all rollovers to Roth IRAs are penalty free, but any distribution from the Roth may not be. The rollover to Roth does not count for regular Roth contribution MAGI, but does for most other versions of MAGI.
Sort of. If you withdraw the funds from this rollover, the taxable portion must come out before the non taxable portion. Since the 10,000 was the taxable portion, you would be subject to the 10% penalty if withdrawn before 5 years is completed or you reach 59.5. The other 20,000 which would come out tax and penalty free comes out after the 10,000. This rule is part of the Roth IRA distribution ordering rules.
Yes, correct. Following the instructions for Part III of Form 8606 will produce this result. You would also need a 5329, Part I if you owe the 10% penalty.
Permalink Submitted by Toby Hartley on Thu, 2021-12-16 22:15
Piggy backing on this as I did search before posting…. Had a client ask if they could roll their 403b ROTH to a ROTH IRA. They are over 59.5 and account was established 5+ years ago. Thought I was right in saying that was fine. Note: no employer contributions. But, another rep called into the IRS hotline and was told “it would be immediately taxable on the earnings” Am i missing something?
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-16 22:37
No, there was some miscommunication between the IRS and who they talked to. Rollovers from a Roth account to another Roth account are never currently taxable. But a distribution from the Roth IRA might be if the Roth IRA is not yet qualified.
Which account has been held over 5 years, the Roth 403b, Roth IRA, or both? If it’s the Roth IRA, then all distributions from the Roth IRA are tax free including the funds rolled in from the 403b.
Permalink Submitted by Toby Hartley on Thu, 2021-12-16 22:40
The ROTH 403b has been active for 5+ years. Now that they are separated from service with the district, they are wanting to move to ROTH IRA so they don’t have to deal with the TPA every time they make changes, withdrawals etc. The ROTH IRA will be a new account started up with the rollover over from the 403b ROTH
Permalink Submitted by Alan - IRA critic on Fri, 2021-12-17 01:39
I assume the “new Roth IRA” is client’s only and first Roth IRA. If so, because the Roth 403b was qualified, that balance will be treated as regular Roth IRA contributions, available for distribution without tax or penalty. Gains generated in the Roth IRA will not be qualified until the Roth IRA has been held 5 years. But because all Roth IRAs are treated as one combined account, IF client had a prior Roth IRA that has been held 5 years, all Roth IRA accounts are qualified.