Roth 5-Year Rule & a 457 plan
Client over 70 wishes to fund a Roth this year but is worried about the 5 year rule and taxation on gains if they withdraw funds in under 5 years. Hs is over 70 so the 59-1/2 is not an issue, only the 5 year rule. Our question is he has a 457 plan with pre-tax and Roth. Can he use that date of first 457 Roth contribution for calculating the 5 year rule for his new brokerage Roth? We originally thought the five-year period starts on the first day of the tax year for which one makes a contribution to any Roth IRA, not necessarily the one you are drawing from but then…ran across some information that the rule applies differently for an employer retirement plan so want to clarity with the gurus!!!
Thank you in advance!
Permalink Submitted by Alan - IRA critic on Fri, 2022-11-04 16:21
The first contribution date for a Roth 457b cannot be used for a Roth IRA. However, until the Roth IRA meets the 5 year holding period, all contributions including conversions can be withdrawn without tax or penalty. Gains come out last. Further, If the Roth 457b is rolled over to the Roth IRA, and the Roth 457b is qualified, the entire balance rolled over is treated as a regular Roth IRA contribution, available without tax or penalty. If the Roth 457b is not yet qualified when rolled to the Roth IRA, only the amount contributed to the Roth 457b will be treated as regular Roth IRA contributions. Again, earnings actually generated in the Roth IRA itself do not become tax free until the Roth IRA is held 5 years, and that 5 years starts on 1/1 of the contribution year. Therefore, if he contributes for 2022, his holding period starts 1/1/2022, even if his contribution is done early next year.