Roth 401K to Roth IRA rollover

Submitted by Rebecca Barnes on Tue, 2019-04-16 18:53

Client John Doe had a Roth 401k of $30,000 ($25,000 in contributions and $5,000 in earnings) to which he had been contributing since at least 2013. In 2018, at age 60 he rolled the Roth 401k over to a new Roth IRA.

John now wants to take money out of the Roth IRA.

Is the basis in this Roth IRA $25,000 or $30,000, assuming no additional Roth IRA contributions?

If he made a contribution to the Roth IRA for 2018 as well, is the basis simply calculated as rollover basis plus IRA contribution amount?

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Permalink Submitted by Alan - IRA critic on Tue, 2019-04-16 22:06

This response assumes that this new Roth IRA is client’s first and only Roth IRA, and that client’s Roth 401k contributions were all elective deferrals, no in plan Roth rollovers.
If so, his Roth IRA basis for regular contributions is 30,000 because his Roth 401k was already qualified at the time of the rollover.
If he made a regular Roth IRA contribution to the Roth IRA in addition to the rollover, that contribution is added to his Roth IRA regular contribution basis.
His Roth IRA will not become qualified until 1/1/2023, but until then the bulk of his Roth IRA could still be distributed tax and penalty free.

Permalink Submitted by Rebecca Barnes on Wed, 2019-04-17 16:09

Thank you so much for your response!That is what I thought based on researching, but I couldn’t find it definitely spelled out in the IRS literature.

Permalink Submitted by Josh Sivers on Mon, 2019-08-26 16:53

Hello all,Sorry to bump an old post, but it is relevant to me today. Can anyone help me with a code or rules citation for this point made above:his Roth IRA basis for regular contributions is 30,000 because his Roth 401k was already qualified at the time of the rolloverAny help would be appreciated. I’ve seen this point made elsewhere but colleagues of mine insist otherwise.

Permalink Submitted by Alan - IRA critic on Mon, 2019-08-26 17:03

Applicable IRS Reg. 1.408A-10, Q 3 is copied below. See final sentence, as this was a qualified Roth 401k.
Q-3. For purposes of the ordering rules on distributions from Roth IRAs, what portion of a distribution from a rollover contribution from a designated Roth account is treated as contributions?A-3. (a) Under section 408A(d)(4), distributions from Roth IRAs are deemed to consist first of regular contributions, then of conversion contributions, and finally, of earnings. For purposes of section 408A(d)(4), the amount of a rollover contribution that is treated as a regular contribution is the portion of the distribution that is treated as investment in the contract under A-6 of § 1.402A-1, and the remainder of the rollover contribution is treated as earnings. Thus, the entire amount of any qualified distribution from a designated Roth account that is rolled over into a Roth IRA is treated as a regular contribution to the Roth IRA. Accordingly, a subsequent distribution from the Roth IRA in the amount of that rollover contribution is not includible in gross income under the rules of A-8 of § 1.408A-6.

Permalink Submitted by Josh Sivers on Mon, 2019-08-26 18:01

I appreciate you taking the time to do that.

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