Question: client separates from service, wants to roll over his Roth 401k money to his Roth IRA. His existing Roth IRA will be 5 years old in Jan 2011. Can he do this rollover from his Roth 401k and then make withdrawals penalty free after his Roth IRA has 5 years?
Thanks. Just clarify… He will have had his Roth IRA for 5 years in Jan 2011. If we rollover his Roth 401k to his existing Roth IRA can we withdrawal his Roth 401k contributions, which would now be inside the 5 year old Roth IRA, without penalty? I know we can’t take out gain. I am just talking about basis.
Yes. Unlike direct distributions from a Roth 401k which must be apportioned between contributions and earnings, if the Roth 401k is rolled over to a Roth IRA, the Roth IRA ordering rules apply. Therefore, even if the Roth IRA is not yet qualified, the amount equal to the Roth 401k contributions comes out first, tax and penalty free.
In your example, if the Roth IRA is 5 years old AND client is 59.5, then the entire Roth 401k balance rolled over is instantly qualified, and the entire Roth IRA balance is tax and penalty free.
Permalink Submitted by Alan Spross on Wed, 2010-10-27 23:09
It depends on his age. For his Roth IRA to be qualified he must have reached 59.5 as well as meeting the 5 year holding period. If the Roth IRA is qualified, all distributions are tax and penalty free.
But if he is not yet 59.5, his Roth IRA is not qualified, and if he takes distributions, the ordering rules apply. Then client would need to determine how much can be taken out tax free because they are treated as regular contributions, conversions, or earnings. The 10% penalty would also apply to any Roth IRA conversions under 5 years and earnings that were distributed.
Note that the ROth 401k has not been around long enough for anyone to have met the 5 year holding period in the designated Roth account. In that case with a rollover to a Roth IRA, the contributions are treated as Roth IRA regular contributions and the earnings are treated as Roth IRA earnings. Therefore, the Roth IRA must be qualified to avoid tax and possible penalty on parts of the distribution.