I have a 71 year old client she retired and rolled over her Roth 401k funds to a Roth IRA. She did not previously have a Roth IRA open before the rollover. Does she now have to wait 5 years before taking a distribution from her Roth IRA? Thank you for your help!
No need to wait. If her Roth 401k had been held for 5 years, the entire rollover amount is qualified, and will be treated as regular Roth IRA contributions in the Roth IRA. That means that any portion of that rollover she wishes can be withdrawn without taxes due. However, any earnings generated after the rollover do not become tax free for 5 more years. She started with 0 Roth IRA earnings.
If she did NOT contribute to her Roth 401k until 2017, her Roth 401k money was not qualified. In that case, only amount she actually contributed to the Roth 401k is treated as regular Roth IRA contributions. Earnings on both the Roth 401k contributions and any earnings generated in the Roth IRA do not become tax free until the Roth IRA has been held 5 years.
Therefore, she needs to determine how much of the Roth 401k money can be treated as regular Roth IRA contributions. That amount can be distributed tax free anytime. She should make note of that amount so she can correctly report any Roth IRA contributions before the Roth IRA is qualified.
If she withdraws from the Roth IRA she will have to complete Form 8606 until the Roth IRA is qualified 5 years from when it was opened. If the rollover was done in 2020, 2020 will count as the first of those 5 years.
Permalink Submitted by David Mertz on Wed, 2021-01-20 02:35
If she met the 5-year rule for the Roth 401(k) before making the distribution from the Roth 401(k) that was rolled over to the Roth IRA, meaning that the distribution was a qualified distribution from the Roth IRA, all of the money that was rolled over is treated as contribution basis in the Roth IRA.
If she did not met the 5-year rule for the Roth 401(k) before making the distribution from the Roth IRA, only her contribution basis in the Roth 401(k) and any basis from in-plan Roth Rollovers to the Roth 401(k) are treated as contribution basis in the Roth IRA and any earnings accrued in the Roth 401(k) become earnings in the Roth IRA.
Either way, Roth IRA contribution basis comes out of the Roth IRA tax-free before any earnings that are taxable if distributed from the Roth IRA before the 5-year qualification period for the Roth IRA is completed.