Roth 401k rollover to Roth IRA
If a retired employee older than age 59 ½ rolls her Roth 401k (as a qualified distribution) to a brand new Roth IRA, does the entire account value become basis, so that, basis can now be withdrawn without tax or penalty even though the IRA is less than 5 yrs old?
If yes, then opening a Roth IRA earlier to satisfy the 5 yr wait becomes less important.
Permalink Submitted by Alan Spross on Wed, 2009-11-25 19:03
Yes, the entire amount from the designated Roth account becomes basis in the Roth IRA. However, since the Roth 401k was first available in 2006, there is no way a distribution would be qualified until 2011 at the earliest.
Assuming the qualified rollover to a Roth IRA that is not yet qualified, the ordering rules still apply to Roth IRA distributions. While the qualified designated Roth money will be considered basis in the Roth IRA, any earnings on that money will be non qualified until the Roth IRA itself meets the 5 year holding requirement plus age 59.5.
As you indicated, since the designated Roth money will be available tax and penalty free from the Roth IRA, there is little urgency in establishing the Roth IRA earlier, since only the earnings generated on the designated Roth money will have to wait for qualification until the Roth IRA reaches 5 years.
In addition, if the basis in the designated Roth account is higher than the account value upon rollover, the higher amount contributed to the Roth 401k becomes basis in the Roth IRA rather than just the amount rolled over.