roth 5 year
question regarding the 5 year wait rule on deposits. If a Roth account was established 8 years ago and my client wants to start contributing to a Roth 401k would the 5 year clock of started 8 years ago or is the 401k Roth a new registration that would need another 5 years. Thanks
Permalink Submitted by Alan - IRA critic on Thu, 2015-01-15 16:16
A new 5 year clock would be required for the Roth 401k with respect to distributions directly from the Roth 401k. However, if the client eventually rolls over the Roth 401k into the Roth IRA, the Roth IRA clock will apply to all distributions from the Roth IRA. Once client reaches 59.5, the entire Roth IRA would be qualified including rollovers from the Roth 401k. In addition, distributions from the Roth IRA have more beneficial ordering rules before the Roth is qualified (non taxable amounts come out first), while non qualified distributions from the Roth 401k include a pro rated amount of earnings. This all adds up to rolling the Roth 401k into the Roth IRA right after he separates from the Roth 401k employer. That also avoids RMDs.