Roth 401(k) to Roth IRA

Submitted by Jay P. on Thu, 2022-11-17 14:55

Hello –

A self-employed client (age 50) has a SOLO Roth 401(k) at TD Ameritrade that began in June 2020. They are eliminating the use of Roth 401(k)’s after Dec 1, 2022 and the assets are being forced out. Same client has a Roth IRA that was originally contributed to roughly 10 years ago. The client would like to roll the Roth 401(k) to his Roth IRA. Would this not be considered a “qualified distribution” b/c he is under age 59 1/2 and the 401(k) was started less than 5 years ago? If so and if it is rolled to his Roth IRA, what are the consequences? He has no intention of withdrawing 401(k) or IRA money until age 65 or later. Is there a better option? Thank you.



Submitted by Alan - IRA critic on Thu, 2022-11-17 15:48

A Roth to Roth rollover is not currently taxable. Since the Roth 401k is not qualified, only the contribution basis is added to the Roth IRA contribution basis for purposes of tax determination for a Roth IRA distribution prior to Roth IRA qualification at 59.5. The amount contributed to the Roth 401k will show in Box 5 of the 1099R reporting the direct rollover. Client just needs to update their Roth IRA contribution basis in order to be know how much could be distributed from the Roth IRA before taxable earnings would be part of the distribution. Client should be very careful in doing the direct rollover that any pre tax sub account is rolled to a TIRA and the Roth sub account to the Roth IRA. If any of these amounts goes into the wrong account, it presents a very nasty problem.

Submitted by [email protected] on Thu, 2022-11-17 17:22

Okay…thank you.  Couple follow ups:   1) I understand the importance of updating the basis in the Roth IRA, but if the client does take a distribution prior to 59 1/2, will all Roth IRA distributions beyond that age be tax-free or will the earnings on the Roth 401(k) rollover (and subsequent earnings from that rollover) still be taxable at any age after 59 1/2?    2) If Roth 401(k) contributions are $50,000, but current value is $45,000…then basis rolled over is $50,000 and there is no earnings to tax whenever there is a distribution from the Roth IRA, correct?

Submitted by Alan - IRA critic on Thu, 2022-11-17 18:17

  1. All Roth IRA distributions will be tax free at 59.5, including the balance from the Roth 401k.
  2. No earnings to be taxed from the Roth 401k funds. But if the Roth IRA already holds gains of 20k, and 45k of Roth 401k with a 50k basis is added by rollover, there will still be a net gain of 15k in the Roth IRA. Client will be taxed on that 15k if any of it is distributed prior to 59.5, but the Roth IRA basis comes out prior to any earnings being distributed per the ROth IRA ordering rules for distributions.
  3. Since the Roth 401k is underwater, any distribution from that account would also be tax free until the account gains back the 5000 loss. After that any gains would be pro rated into any distribution. There is no downside to the Roth 401k rollover to the Roth IRA.

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