>5% owner/70.5/Roth 401k & IRA
Client:
100% owner
Turns 70.5 in 2017
401k: Roth & Pre-tax dollars
Roth IRA outside (not sure exactly how long been open. Believe <5 years)
No plans to stop working
All his contributions are Roth 401k. (tax deduction doesn’t really help and RMDs requirement pretty much negate benefit of pretax)
Roth 401k (opened for 5 years after end of 2017)
My understanding is that we can take the full RMD from pre-tax dollars and leave the Roth dollars intact. Assuming this is correct, we would like to then roll the Roth K to Roth IRA. B/c the Roth K is < 5 years will he be subject to taxes? If there are taxes we can wait until April 2018 to take RMD once we have met 5 year rule.
No plans to touch to Roth IRA.
If we completely roll the Roth K out will this reset the 5 year clock? If so can we leave some dollars in Roth K to keep clock going or is there any other advantage to leaving funds in the plan?
Thanks in advance!
Nick
Permalink Submitted by Alan - IRA critic on Thu, 2017-01-26 20:08
If the Roth 401k is rolled into a qualified Roth IRA, the entire Roth IRA balance will then be qualified. Even if not yet qualified, it will be very soon and he will not need to take any distributions from the Roth IRA until then. However, in order to do this rollover, he must first complete the plan RMD for 2017. For this plan RMD he does have a choice whether it comes from the pre tax or the Roth portion of the plan, therefore making that choice may depend on the amount of taxes he wants to pay for 2017. For example, if his Roth 401k sub account has 20% earnings, then only 20% of a Roth 401k RMD would be taxable. If he takes the RMD from the pre tax portion the RMD will be 100% taxable lacking any after tax sub account balance. While he could wait until 2018 to take the plan RMD, he cannot do a Roth IRA rollover without first taking the plan RMD. That would result in two plan RMDs for 2018 before doing the rollover, and that could increase his taxes depending on which portion of the plan he uses for those RMDs. Perhaps that Roth 401k rollover should have been done last year as that would have avoided all plan RMDs on the Roth balance. But once the Roth 401k is rolled out, he may want to change his deferrals to entirely pre tax if he expects his tax rate in retirement to be lower than what he is paying now. While a rather confusing mix of variables and timing considerations, his current tax rate vs. expected rate in retirement and when he plans to retire is also a factor.