Is 5 Year Roth Rule Met if funds were previously Roth 401k moved to Roth IRA

Submitted by Peter Newman on Wed, 2018-01-10 12:31

Hello IRA Experts,

I have a situation where individual had money in Roth 401k for more than 5 years (about $10k). After she left her job, she moved the money from Roth 401k to Roth IRA. However, funds have only been in Roth IRA for 2 years.

Now she would like to liquidate all of the funds in Roth IRA. I know there is a 5 year rule on Roth IRAs and Roth 401k independently, but does the “number of years’ credit from the Roth 401k being opened apply to the funds that were moved into the Roth IRA?

In other words, can she take penalty free distribution from the Roth IRA since it has actually been Roth money for about 7 years when you count both the Roth 401k and the Roth IRA?

Thank you,
Peter



Submitted by Alan - IRA critic on Wed, 2018-01-10 16:43

  • Assuming her Roth IRA is not qualified because she is not yet 59.5, and also that the Roth 401k was not qualified for the same reason, then the amount she contributed to the Roth 401k (this shows on the 1099R for the rollover to the Roth IRA) is treated as regular Roth IRA contributions. This amount could be more or less than the amount actually rolled over to the Roth IRA. The 5 year period is immaterial in this situation for either account UNLESS she did an in plan conversion in the Roth 401k, which is unlikely. 
  • She also needs to know the composition of her Roth IRA (amount of regular and conversion contributions and age of conversions), then the Roth 401k rollover is just integrated into that as stated above. Therefore, if there have been no conversions in either the Roth 401k or Roth IRA, it is fairly simple. Her regular Roth IRA contributions plus the amount she contributed to the Roth 401k come out tax and penalty free. Amounts in excess of that are subject to both tax and penalty. The distribution will be reported on Form 8606, and she needs to know these amounts to complete that Form.
  • If my age assumptions are incorrect, please advise details, and when she first contributed to the Roth IRA, if earlier than the 401k rollover.

Submitted by David Mertz on Wed, 2018-01-10 19:12

The 5-year period for the Roth 401(k) does not carry over to the Roth IRA.  If the individual had no Roth IRAs prior to the rollover from the Roth 401(k), the 5-year period for the Roth IRA starts at the beginning of the year in which the rollover contribution was made to the Roth IRA.  Prior to the 5-year period being met for the Roth IRA, any distribution of earnings from the Roth IRA will be taxable and potentially subject to early-distribution penalty.  However, as Alan mentioned, original contributions rolled from the Roth 401(k) to the Roth IRA become contribution basis in the Roth IRA and those can be distributed from the Roth IRA at any time without tax or penalty.

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