Roth 401(k) addendum

Submitted by Walter Apelt on Thu, 2014-01-16 14:05

We are about to add the Roth feature to an existing 401(k)that will allow redirecting deferrals as well as permitting in-plan conversions of existing deferrala. The “59 1/2 and 5-year rule” comes up and the literature I have been able to find refers to keeping the Roth deferrals in the plan for at least 5 years before a tax-free qualified distribution can occur. No mention seems to be made on whether ‘rollovers’ due to retirement or age can be made to a Roth IRA without penalties. Can they be madeto a Roth IRA just as can traditional deferrals? I know the clock starts again with the Roth IRA which is why we are advocating starting the ’59 1/2-5-year’ clock by opening a Roth IRA now since most will income qualify. Also, can an in-plan conversion also include earnings accrued on the deferrals?



Submitted by Alan - IRA critic on Thu, 2014-01-16 16:02

  • Here is a recent IRS Notice that covers many of your questions:   http://www.irs.gov/irb/2013-52_IRB/ar11.html. Qualification rules are the same as for a Roth IRA, ie 5 years and age 59.5. Distributions from the plan including rollover to a Roth IRA depend on the usual guidelines such as separation from service, or attaining a certain age. Rolling a designated Roth to a Roth IRA is not taxable or subject to penalty, but the employee must document the accounting for the Roth IRA. Amounts of contributions are treated as Roth IRA contributions and earnings as Roth IRA earnings. The holding period is that of the Roth IRA, but if the Roth 401k was fully qualified then the rollover is deemed to be 100% Roth IRA contributions.
  • An in plan conversion includes amounts allowed by the specific plan, but can include earnings and co matching contributions. Some of an IRR could be tax free due to after tax contribution basis being included.

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