401(k) Roth IRA and 5 years

Submitted by abraham boznick on Sun, 2018-09-23 04:49

I have 401(k). I plan to retire shortly and transfer my 401(k) Roth IRA into regular brokerage held Roth IRA. While I was in 401(k) plan I have contributed to my 401 (k) Roth IRA for less than 5 years (though I have after tax contribution in my 401(k) which I had for much longer than 5 years). I also have separate brokerage held Roth IRA accounts which I have established well over 5 years ago. What are the tax consequences in my case in transferring my 401(k) Roth IRA into a regular Roth IRA? Especially in view of 5 year period of maintaining Roth IRA account. thank you.



Submitted by Alan - IRA critic on Sun, 2018-09-23 15:52

  • A Roth account in a 401k plan is not an IRA, it is a designated Roth account and the rules are considerably different than for a Roth IRA. However, both accounts become qualified after 5 years and age 59.5 and your age was not stated, so it is not clear whether either Roth is qualified.
  • If your Roth 401k is NOT qualified, but your Roth IRA is qualified, the funds from the Roth 401k become qualified once rolled into the Roth IRA. All distributions are then tax free.
  • If neither is qualified, the contributions made to the Roth 401k are treated as Roth IRA contributions once in the Roth IRA. Therefore your Roth elective deferrals can come out anytime without tax or penalty.  Your 1099R from the 401k will show your deferrals in Box 5 and that amount is added to your Roth IRA regular contribution basis. If you did IRRs in the Roth 401k, these are treated as conversions in the Roth IRA and the 5 year holding period for conversions runs through both plans. You become responsible for tracking the composition of your Roth IRA after the rollover so you can report any distributions on Form 8606. Once your Roth IRA is qualified, an 8606 is no longer needed and you can forget further Roth IRA basis tracking.
  • If neither account is qualified, time in the Roth 401k is erased and only the Roth IRA 5 year holding period matters. 
  • All these combinations can be confusing. If you provide your age and the number of years you have held both accounts, I can simplify this.
  • Your after tax non Roth contributions in your 401k do not affect the 5 year period of the designated Roth. While your designated Roth account that is rolled over MUST go into your Roth IRA, you should also use Notice 2014-54 to have your contributions to the after tax sub account rolled into your Roth IRA. The earnings on these after tax contributions would go to your TIRA along with the pre tax balance of your 401k.
  • Again, what goes to your Roth IRA is the entire designated Roth balance plus the amount of non Roth after tax contributions. Everything else goes to your rollover TIRA. You have to be very precise when you request these direct rollovers, since any error can be costly and usually cannot be corrected.
  • Any questions, please advise.

Submitted by abraham boznick on Mon, 2018-09-24 00:24

Thank  you for your thorough answer. I am 61 years old. I have a separate Roth IRA that I have established 20 years ago. My Roth 401(k) at work is only 2 years old though. I was under the impression that Roth 401 (k) and Roth IRA have DIFFERENT 5 year clocks. Meaning that if I rollover my Roth 401(k) into Roth IRA account, I have to wait for additional three years, in my case, before I can start withdrawing the earnings on the converted ROTH 401(k) portion — am I correct on that?  The good news  I suppose that I do not realy have  to closely track the withdrawls — as it is first in/first out – -meaning that my Roth 401(k) should be withdrawn last. Thank you

Submitted by David Mertz on Mon, 2018-09-24 02:07

No, the 5-year clock for the Roth 401(k) does not carry over to the Roth IRA.  Once you roll the Roth 401(k) over to a Roth IRA, the funds rolled over become subject only to the Roth IRA’s 5-year clock which has already been satisfied.  Since you are over age 59½ and have satisfied the Roth IRA 5-year clock, ANY distribution you take from your Roth IRAs is a qualified distribution, tax free, no matter how the funds got into the Roth IRA. 

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