Roth IRA distribution of Roth 401K basis
I would need a reminder on how Roth 401K basis (after-tax) that is rolled over to a Roth IRA is treated when distributed. Can one take it out penalty-free as with regular Roth contributions?
Age – under 59 1/2
Thanks (I can’ find the thread where this was mentioned once).
pmk
Permalink Submitted by Alan Spross on Fri, 2009-11-13 00:36
pmk,
Since the Roth 401k was first available in 2006, no rollover to a Roth IRA can be qualified until 2011. A non qualified Roth 401k balance rolled to a Roth IRA is added to the Roth IRA balance as follows:
1) Contribution balance to the Roth 401k is added to the amount of regular Roth IRA contributions*
2) Earnings from the Roth 401k are added to the balance of Roth IRA earnings
* The IRS release is confusing in some respects, but I believe that if the Roth 401k balance in a full rollover is LESS than the basis contributed, the basis contributed to the Roth 401k is the figure added, not just the amount of the rollover. This would mean that losses in the Roth 401k would not be lost, but could effectively be used to reduce the amount of earnings carried in the Roth IRA. This one might need further clarification…..
This calls for some documentation to your Roth IRA records at the time of rollover to record the new balances, so that future Roth IRA distributions can be properly reported on Form 8606.
After 2010, when some Roth 401k distributions could be qualified (5 years plus 59.5), the entire rollover is considered in the balance of Roth IRA regular contributions (basis). The holding period for the Roth IRA is always based on just the IRA holding period. The Roth 401k period cannot be added to it, even if the Roth 401k was qualified. But since Roth 401k earnings would come out tax and penalty free, it does not matter. Of course, there are NO conversions within the Roth 401k to add to the confusion with their own holding period.
Under these rules, note that there is no way that the holding period of a Roth 401k can be used to make the Roth IRA itself qualified.
http://edocket.access.gpo.gov/2007/pdf/E7-8125.pdf
Permalink Submitted by Anonymous (not verified) on Fri, 2009-11-13 01:26
Thanks alan.
If I understand this correctly then if a Roth owner takes out all regular contributions in 2008 and in 2009 wants to take [u]only[/u] the Roth 401K basis that was rolled “into it”, he/she (age 30 today) can not avoid the 10% penalty?
pmk
Permalink Submitted by Alan Spross on Fri, 2009-11-13 02:11
There would be no penalty, because you are just removing basis. Once in the Roth IRA and in the right category (contributions or earnings), the taxation is handled in all respects as a Roth IRA distribution on Form 8606. And the regular contributions that originated from the Roth 401k would come out prior to any conversions in the Roth IRA.