Roth 401(k) Rollover
A client (65yrs old) rolled over an entire 401(k) splitting up the Roth/Pre-Tax contributions to a newly created Roth IRA and a established IRA. Client needs to start taking withdrawals, and had a unexpected contract work income this year. So, they would like to take from Roth IRA, but based on it being established this year, my assumption is the 5yr rule qualified distribution applies? There is no ability to only take “contributions” out of the IRA right?
Permalink Submitted by Alan - IRA critic on Tue, 2021-07-20 17:15
Yes, there is under the Roth IRA ordering rules. Assuming client had no prior Roth IRA balance, after the Roth 401k rollover the client will be treated as having a regular Roth IRA contribution balance equal to his contributions to the Roth 401k if his Roth 401k was not yet qualified. Since he is 65, if he first contributed to the Roth 401k prior to 2017, then he has met the 5 year holding requirement also, and his Roth 401k was qualified. In that case, the entire balance of the rollover is treated as regular Roth IRA contributions, meaning that he could withdraw the entire balance rolled over without tax or penalty under the Roth IRA ordering rules. As for any additional gains in his Roth IRA after the rollover, he has to complete 5 years for the Roth IRA itself for those additional earnings to be qualified and tax free. Put another way, even though his Roth IRA will not be qualified until 2026, he can still take a non qualified Roth IRA distribution up to the amount of his rollover, tax and penalty free if his Roth 401k was qualified, and up to the amount of his Roth 401k contributions if it wasn’t qualified. He will have to report this on Form 8606. Therefore, the first thing he needs to do is determine if he first contributed to the Roth 401k prior to 2017 or not.