Opening a Roth IRA for eventual Roth 401(k) Rollover

Submitted by Kevin Reardon on Wed, 2023-09-27 14:29

I have client who is currently 53 and has a balance in a Roth 401(k). The plan is to ultimately roll the funds over to a Roth IRA when he retires at 60. He does not currently have a Roth IRA and won’t be eligible to make contributions while he is working, given his income is too high. Is there any benefit to opening a Roth IRA now? I don’t think that would be the case since the 5-year rule would take effect once he rolls over the funds from the Roth 401(k), correct? Thanks!

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Permalink Submitted by Alan - IRA critic on Wed, 2023-09-27 15:03

The only advantage to making a Roth IRA contribution now is that the 5 year holding period would be satisfied by the time of the Roth 401k rollover. However, it’s not really important because his Roth 401k will be qualified at the time of the rollover, meaning that the entire opening balance of the Roth IRA could be distributed tax free. Only the gains that occur in the Roth IRA will have to wait 5 years to be tax free, so unless client feels that he would have to nearly drain the Roth IRA before the 5 years is up, this is not a big deal.
But suppose the client does want earnings generated in the Roth to be qualified right away. A current contribution would be needed but his income is too high for a regular Roth contribution. Client could still do a very small conversion to start the 5 year clock if client has a TIRA, and if not client could make a small non deductible TIRA contribution and then convert it right away, and the 5 year clock for the Roth IRA would start.
Note that an excess regular Roth IRA contribution does NOT start the 5 year clock.