Rollover 401k After-Tax Contributions to Roth IRA
Hi,
I have a minor difference of opinion between our financial planner and my wife’s 401k agent. As part her qualified full distribution from her 401k, she has after-tax contributions that were moved / rolled-over into a ROTH IRA.
Our financial planner stated: “Roll the after-tax contributions into a new Roth IRA. The Roth IRA would not be subject to the 5 year rule, given that her account has been open for more than 5 years. It makes sense to roll this contribution into a Roth because you will never be taxed again on this money”.
The 401k agents disagrees. Who is correct?
Thanks. George
Permalink Submitted by Alan - IRA critic on Thu, 2017-12-21 18:46
There is no reason to open a new Roth to receive the direct rollover if your wife has an existing Roth since all Roth accounts are treated as one combined account anyway. With respect to the 5 year holding requirement for a conversion to avoid a 10% penalty, the requirement would apply in the same way to a rollover into an existing Roth or a new Roth. A distribution taken in the 5 year period is deemed to follow the Roth ordering rules regardless of which Roth account it comes from. Further, if the conversion is a non taxable one because it was only composed of after tax contributions, the 5 year holding requirement for this conversion does not even matter because the 10% penalty only applies to the taxable portion of a conversion, and this one is not taxable. However, it does make great sense to do a split direct rollover sending the after tax balance to a Roth because this can be done with no current taxes, and the Roth will eventually be completely tax free. Therefore, it appears that the planner’s statements are basically correct except the part about the 5 year period and the need for a new Roth account