Roth Conversion within a 401k plan

Submitted by Denise Dawson on Fri, 2013-01-04 19:28

I know this is an IRA forum, but thought there might be someone out there who could help. IF your 401k plan allows in plan conversions, is there a holding period on the conversion money (outside of the general plan triggering events)? So if I did an in plan conversion in 2012, under 59.5, and separate service in 2013, how would the conversion assets be treated when I roll them to a roth ira?



Submitted by Alan - IRA critic on Fri, 2013-01-04 22:26

  • There is a 5 year holding requirement for an “in plan rollover” (IRR) just as there is for a Roth IRA conversion. So if you took a non qualified Roth 401k distribution that included such a rollover, the portion allocated to the taxable portion of the rollover would have a 10% penalty if under 5 years. In addition, a Roth 401k does not adhere to Roth IRA ordering rules for distributions. A Roth 401k distribution includes earnings pro rated with regular contributions and IRR rollovers, so adding the IRR made these distributions much more complicated. But a Roth 401k breakdown must be shown on the 1099R by the plan administrator, so the employee does not have to figure this out for tax reporting, just tax planning.
  • But that was not even your question, your question is how the Roth IRA treats amounts rolled in from a designated Roth 401k plan which may just have received an IRR from the traditional 401k account. Once this happens the Roth IRA balance is all handled under the Roth IRA ordering rules, and now the all this complex accounting suddenly falls to the Roth IRA owner, who must provide the data to complete Form 8606 for the Roth IRA distribution for a non qualified Roth IRA.
  1.       First out of the non qualified Roth IRA are Roth regular contributions and salary deferral contributions made to the Roth 401k(shows on the 1099R).
  2. Next out are Roth IRA conversions, qualified rollovers from a traditional 401k and IRRs from the Roth 401k, oldest year first and within each such year, the aggregated taxable amounts before the non taxable amounts. Your specific example falls here. If you took a Roth IRA distribution of an IRR that you rolled into the Roth IRA in less than 5 years, there would be a 10% penalty on the taxable amount of the IRR.
  3. Last out are earnings from the Roth IRA and earnings from a non qualified Roth 401k rolled into the Roth IRA.
  4. In a nutshell, anyone who take a non qualified Roth IRA distribution of a Roth containing all these rollovers is going to have a real problem doing their accounting to complete the 8606.

 



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