5-year clock on Roth 401(k) contributions
Suppose I first contributed to my Roth 401(k) back in, say, 2012, and am now over 59.5.
If I transfer that full Roth 401(k) balance to my Roth IRA, does my fulfillment of the 5-year clock “carry over” to the Roth IRA, meaning I can take fully qualified tax-free distributions?
Permalink Submitted by David Mertz on Wed, 2022-03-02 22:45
The 5-year clock itself does not carry over to your Roth IRAs, but because a distribution from the Roth 401(k) is a qualified distribution, the entire amount rolled over to your Roth IRAs becomes contribution basis in your Roth IRAs. You still would have to wait until 5 years after the beginning of the year that you first made a Roth IRA contribution for earnings that occur in your Roth IRAs to be distributable tax-free. For example, if a rollover from this Roth 401(k) established your first Roth IRA in 2022 and you made no other Roth IRA contributions, you could take out tax-free any amount up to the amount rolled over from the Roth 401(k) but anything distributed beyond that (earnings in the Roth IRA) would not be tax-free until 2027.
Permalink Submitted by Robert Vashko on Thu, 2022-03-03 00:16
Thank you! So, to rephrase it:If you’re, say, age 62, and you roll over a $100,000 Roth 401(k) to your first Roth IRA ever, there is a 5-year clock on the *gains* on that $100k, but any withdrawals come from that $100k first, both tax and peanlty-free, based on the ordering rules?
Permalink Submitted by David Mertz on Thu, 2022-03-03 00:33
Correct, as long as you have met the 5-year period for the distribution from the Roth 401(k) to be qualified. If you have not met the 5-year rule for the Roth 401(k) to be qualified, your original contributions to the Roth 401(k) become contribution basis in the Roth IRA but the gains rolled over to the Roth IRA become gains in the Roth IRA.
The key is that any amount from the Roth 401(k) that would have been nontaxable if distributed to you and not rolled over becomes contribution basis in the Roth IRA when rolled over, with the rest, if any, becoming gains in the Roth IRA. If your Roth 401(k) was, say, less than a year from meeting the Roth 401(k) 5-year qualification requirement, you might want to wait to roll the Roth 401(k) over to a Roth IRA unless your Roth IRA is also close to being qualified or is already qualified. On the other hand, if you are several years from meeting the Roth 401(k) qualification period but your Roth IRAs are already qualified, rolling the Roth 401(k) over to the Roth IRA would make the gains that were in the Roth 401(k) immediately distributable tax free from the Roth IRA.
Permalink Submitted by Robert Vashko on Thu, 2022-03-03 00:59
Thx. Makes total sense. Is there a reg/Q&A that speaks to this? Just in case I am asked for “chapter & verse”.
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-03 02:04
This is the applicable Reg:
26 CFR § 1.408A-10 – Coordination between designated Roth accounts and Roth IRAs. | CFR | US Law | LII / Legal Information Institute (cornell.edu)
Permalink Submitted by Alan - IRA critic on Thu, 2022-03-03 02:40
From my interpretation of A-6 of Reg 1.402(A)-1 which is referenced in 1.408A-10 linked above, it appears that the investment in the contract treated as regular Roth IRA contributions after a rollover from a Roth 401k is the amount contributed to the Roth 401k, regardless of whether the Roth 401k was qualified or not. In other words, why would rolling over a qualified Roth 401k that was underwater result in a lower Roth IRA contribution basis than rolling over a non qualified Roth 401k with the same amounts of contributions and value? And if so, any underwater Roth 401k whether qualified or not should have a Box 5 value greater than the Box 1 value. Yes?
Permalink Submitted by David Mertz on Thu, 2022-03-03 04:25
My earlier reply didn’t consider the case where the balance in the Roth 401(k) to be rolled over to the Roth IRA is less than what had been contributed. If the balance in the Roth 401(k) is less than the contribution basis in the Roth 401(k), yes, CFR 1.408A-1 A-6(b) says that the entire amount of contribution basis in the Roth 401(k) transfers to the Roth IRA, but only if the entire Roth 401(k) is rolled over. If only a portion of the underwater Roth 401(k) is rolled over to a Roth IRA, only the portion rolled over becomes contribution basis in the Roth IRA and the rest of the contribution basis remains with the Roth 401(k).