Roth 401k Rollover to Roth IRA

Submitted by Michael Steranka on Thu, 2019-12-19 21:24

Do the same timing rules apply when a Roth 401k is rolled over to a Roth IRA as far as the taxes on the growth? Does the time start when the Roth 401k is rolled over or when the money is received into the Roth IRA?



Submitted by Alan - IRA critic on Thu, 2019-12-19 23:30

The Roth IRA must be qualified on it’s own for Roth IRA earnings to be qualified. If the first Roth IRA contribution is a rollover from the Roth 401k, then the date the Roth IRA receives the funds becomes the first Roth IRA contribution, and that is credited back to 1/1 of that year. However, if the Roth 401k itself was qualified, then the entire balance in the Roth 401k is treated as basis in the Roth IRA. If the Roth 401k was not qualified, then only the contributions made to the Roth 401k are treated as Roth IRA basis. Finally, if the Roth IRA is already qualified when the Roth 401k rollover is contributed, the entire balance rolled over will be immediatly qualified even if the Roth 401k was not. What this boils down to is that you have some detailed accounting to track for your Roth IRA until it becomes qualified on it’s own. 

Submitted by Randy Kolenda on Fri, 2020-01-17 21:42

When rolling a Roth 401k which contains both after-tax employee and pre-tax employer matching contributions – does the pre-tax portion need to be rolled into a Traditional IRA?

Submitted by Alan - IRA critic on Fri, 2020-01-17 23:26

  • A Roth 401k does not include matching contributions unless an in plan Roth rollover was done. When matching contributions are made for Roth 401k deferrals, they must be made to the pre tax 401k account. In any event, once amounts are in the Roth 401k, they must remain in a Roth 401k or Roth IRA. They cannot be rolled back into a pre tax account.
  • Therefore, your Roth 401k balance must be rolled into your Roth IRA if it is going to an IRA. This is a non taxable direct rollover. Once this balance is in your Roth IRA, you need to update the tracking of the composition of your Roth IRA by allocating the Roth 401k deferrals to the regular Roth IRA contribution total, and any in plan roth rollovers as Roth IRA conversions. Any additional value will be treated as Roth IRA earnings. If the Roth 401k balance was qualified (5 years and 59.5) when rolled over, it is all treated as regular Roth IRA contributions in the Roth IRA. Of course, all this detail can be ignored if you are sure that you will not take any Roth IRA distribution until your Roth IRA is qualified.

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