PRE-TAX 401K TO IRA AND AFTER – TAX TO ROTH FOR RETIREE
A client has the $1.2M in their 401k account. The after-tax account balance of $110K includes $59K i(post 86) after tax contribution. He has a Roth IRA- my understanding is that the after tax contributions are only eligible to be rolled over in the Roth IRA and the earnings must be rolled over into the traditional IRA along with the balance of his 401K. Just confirming that the Roth IRA balance will be completely tax-free upon distribution (after meeting the 5-year rule- its currently in the 2nd year) vs distributions being considered partially tax free?
Permalink Submitted by Alan - IRA critic on Thu, 2020-01-09 00:37
The earnings could have been rolled over to either type of IRA, but if they were directed to the Roth, that portion would have been taxable. Since only the after tax contributions were rolled to the Roth IRA, that rollover was non taxable, so there is no 5 year holding period to avoid the 10% penalty. The 5 year holding period only applies to the taxable amount of the Roth rollover, which in this case was 0. That said, if his Roth IRA also contains older taxable conversions still less than 5 years, those older conversions would come out first and would be subject to the 10% penalty.