Some Roth IRA questions
1.) If a 401k does not want to allow a non-spouse beneficiary to do a direct transfer to a Roth IRA, is it so hard to just have them properly title the distribution check directly to the Roth IRA transfer account?
2.) If you have a 401k, and are eligible for Roth IRA and had opened one, what are the time rules on tax free withdrawals when you are eligible to rollover? Is it the 5 year rule on contributions (just the original 5 years on the Roth IRA) or is it the 5 year rule on conversions (start the clock again on each conversion)?
3.) If you have a Roth IRA and a Roth 401k, and you retire/sever and rollover your Roth 401k into your Roth IRA, is there any tax due on anything? And again, is it just the 5 year rule on contributions or the 5 years for each conversion?
4.) If someone age 59 rolls over their traditional 401 K to a Roth IRA, can they begin taxing tax free withdrawals at age 59 1/2? The rule says 5 years OR 59 1/2, right? Doesn’t that create a special opportunity for people age 56 to 59 to beat the 5 year clock?
Permalink Submitted by Alan Spross on Mon, 2008-06-23 21:51
1) That depends on the plan administrator. The transfer is still optional at this point, so the administrator could refuse. However, if the administrator is willing to cut the check to the inherited IRA custodian FBO the employee, mail it to the employee and the employee sends it on to the IRA custodian, that IS technically a direct rollover. There is also the option of waiting until Congress finally moves on the techical corrections legislation for the PPA which would make the transfer mandatory. I believe this requirement is contained in the mark up provisions.
2) Both 5 year rules apply. The one for qualified tax free distributions runs from the first year any Roth is opened, but there is also the age 59.5 requirement as well. In addition, since this is a conversion, the 5 year holding period for each conversion applies with respect to early withdrawal until owner is 59.5.
3) No tax due for a full rollover. This rollover is not a conversion, as both accounts are Roths. However, the Roth IRA aging rules are the ones that apply to all the Roth IRA assets. Therefore, if this is the first Roth IRA, the 5 year clock starts over from year 1. Also, due to a snafu in the legislation, the 100,000 MAGI income limit applies to these rollovers, so in this respect it IS treated as a conversion.
4) Yes, they could take tax and penalty free withdrawals at age 59.5 from the Roth IRA, but the 5 year holding period still applies for any distributions of earnings generated by the Roth IRA. There is no special opportunity here because this treatment is the same as TIRA to Roth IRA conversions. Early withdrawal stops at age 59.5, but the other 5 year holding period for distribution of earnings applies separately. Remember, there are two different 5 year holding requirements, one that affects taxes on earnings, and the other that affects early withdrawal penalties on conversions.