Roth 401(K) to Roth IRA

Submitted by Eddie Holland on Mon, 2018-09-03 16:57

John has $50,000 in a Roth 401(k). He is 62 years old and plans to retire this year. He plans to roll Roth 401(K) into a Roth IRA upon retirement. Currently, John does not have a Roth IRA. When he rolls $50,000 from Roth 401(k) to Roth IRA, how much (if any) can John withdraw from his Roth IRA without incurring any income tax liability and/or penalties?



Submitted by David Mertz on Mon, 2018-09-03 17:21

  • The answer depends on when John first made a contribution to the Roth 401(k).  If the first contribution was made before 2014, meaning that a distribution paid to John from the Roth 401(k) in 2018 would be a qualified distribution (because John has also reached age 59½), entirely tax free, the entire $50,000 becomes contribution basis in the Roth IRA when rolled over.
  • If John’s first contribution to the Roth 401(k) was instead made in 2014 or later, a distribution made in 2018 would not be a qualified distribution because it will not yet have met the 5-year rule and only the contributions made to the Roth 401(k) would become contribution basis in the Roth IRA.
  • Until the Roth IRA meets the 5-year rule in 2023 for Roth IRA distributions to be qualified distributions, any amount distributed from the Roth IRA in excess of the contribution basis in the Roth IRA is includible in income.  The 5-year holding period for the Roth 401(k) does not carry over to the Roth IRA.  Since the rollover in 2018 will establish John’s first Roth IRA, the 5-year clock for John’s Roth IRAs to become qualified begins on January 1, 2018.
  • If the first contribution to the Roth 401(k) was made in 2014, it might be better to delay the rollover until 2019 when the Roth 401(k) will be qualified and the entire amount rolled over to the Roth IRA will become contribution basis.  That choice will depend on how much of the $50,000 in the Roth 401(k) is basis.  If the $50,000 is mostly basis, delaying won’t create much more basis in the Roth IRA.  So that the 5-year clock for Roth IRAs gets started, it still might make sense to do a small rollover to establish a Roth IRA for John in 2018 so as not to delay the date on which John’s Roth IRAs become qualified.  The rollover will consist of proportional amounts of basis and earnings.
  • There are no early-distribution penalties because John is over age 59½.

Submitted by Eddie Holland on Tue, 2018-09-04 15:07

Thank you, DMx.  Could you provide a link to an IRS website explaining this?

Submitted by David Mertz on Tue, 2018-09-04 15:54

[See the reference provided by Benn below.  While similar, the reference I’ve provided here applies instead to a rollover from a designated Roth account to another designated Roth account.]  Basis acquired by the Roth IRA is described in CFR 1.402A-1 Q&A 6:  https://www.law.cornell.edu/cfr/text/26/1.402A-1

Submitted by Ben Meyer on Mon, 2018-09-10 00:29

  • Also see T.R. 1.408A-10, Q&A-3, which is more specific regarding the transfer of basis in a rollover from a designated Roth 401(k) to an Roth IRA:  https://www.law.cornell.edu/cfr/text/26/1.408A-10
  • The determination of the 5-year qualification period for such a rollover is covered in Q&A-4 of the same rule.

    

Submitted by Alan - IRA critic on Mon, 2018-09-10 02:37

  • In a nutshell, when Roth 401k funds are rolled into a Roth IRA, if the Roth 401k is not yet qualified, the 5 year holding period for the Roth IRA is not changed, and any holding period in the Roth 401k is lost. But even if that time is lost, the Roth IRA gains additional basis equal to the contributed amount to the Roth 401k meaning that more distributions can be taken from the Roth IRA without taxes even if the Roth IRA itself is not yet qualified.
  • On the other hand, if the Roth 401k balance is already qualified (5 years and 59.5), and the Roth IRA is not, the entire rollover including gains in the Roth 401k is treated as Roth IRA regular contribution or conversion contribution basis.

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