Confused on Conversion distribution over 59.5, but havn’t completed 5 year clock

Submitted by Jon Steffen on Fri, 2022-10-14 16:29

John Doe is 62 years old and had a Roth 401k that’s been opened for 10 years.

The Roth 401k has had $40,000 of contributions to it, but has grown to $80,000 balance.

He had no Roth IRA, but did a conversion of his designated Roth account in his 401k to a New Roth IRA in 2020

John’s Roth account on the day he did the conversion was at $80,000 balance, but its now at $100,000 balance.

John wants to do a $90,000 distribution from his Roth IRA that has not been opened for 5 years, nor has the conversion completed its own 5 year clock.

From my research, I think the whole $80,000 conversion became his conversion basis. Since he is over 59.5, he would pay no penalty for a distribtuion that didn’t satisfy the Roth IRA 5 year clock. So I think he can take the $80,000 out without penalty, and without tax. But he would pay tax on the $10,000 additional dollars, but would NOT pay a penalty on those dollars, because he’s again over 59.5

Am i right?
If any, what are the taxes and penalties he would owe on this distribution?



Submitted by Alan - IRA critic on Fri, 2022-10-14 16:51

  • Yes, your conclusion is correct. The Rollover to the Roth IRA is just a rollover as the funds were already in a Roth account. The rollover is not a conversion. The 80,000 balance in the Roth 401k was qualified (5 years and over 59.5) and once rolled to the Roth IRA, that 80,000 is treated as a regular Roth IRA contribution. It can be distributed anytime without tax or penalty, and comes out of the Roth IRA first. However, until the Roth IRA itself becomes qualified in 2025, a distribution of any amount of Roth IRA gains after the 80,000 has been distributed will be subject to ordinary tax and reported on Form 8606. There is no penalty on the taxable portion of the distribution because he is over 59.5.
  • Of course, distributing most of his Roth balance at this time that otherwise would generate potentially tax free gains and not be subject to RMDs is not a beneficial decision.

Submitted by Jon Steffen on Fri, 2022-10-14 17:06

Thank you.  Can you tell me how things would change if John Doe’s Roth 401k was only open for say 2 years and he did the rollover?

Submitted by Alan - IRA critic on Fri, 2022-10-14 21:07

Then only the amount he contributed to the Roth 401k would be treated as regular Roth IRA contributions. Any gains would be treated as earnings in the Roth IRA until the Roth IRA became qualified.

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