401k Roth to Roth IRA 5 Year Rule

Submitted by Mhotchkiss on Wed, 2016-03-30 21:32

Client had a 401kRoth for 4 years and 7 months. He’s under 59 1/2. Quit work and is doing a transfer to Roth IRA. Receives check from 401k made out to Roth IRA custodian, no withholding. Wants to deposit into his Roth IRA that is OVER 5 years old. Check stub says he has $40k in contributions(basis) and $20k in gain.

How is the 401k Roth money applied in the Roth IRA? Does it all go in as contributions since the Roth IRA is over 5 years old? Or, does just the basis go in as contribution and the earnings are on a clock?

How to apply this to the 8606?

Thank you,
-m



Submitted by Alan - IRA critic on Wed, 2016-03-30 22:37

  • Since the Roth 401k is non qualified, only the 40k of basis is treated as regular Roth IRA contributions and therefore Roth IRA basis. The excess of the Roth IRA value over the Roth IRA basis is of course earnings. The Roth IRA will become fully qualified at 59.5.
  • The direct rollover is not reported on an 8606, but any Roth IRA distributions taken prior to 59.5 will have to be reported on an 8606 and client will need to know his updated Roth IRA basis after the Roth 401k rollover as described above. If client did any IRR within the 401k, then the IRRs must be tracked relative to 5 year holding periods just like a Roth IRA conversion and these are treated as Roth conversion basis in the Roth IRA.

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