As I understand it, when someone over 59 1/2 rolls over their Roth 401k to a brand new Roth IRA, it begins the 5 year clock for their new Roth IRA. I also understand that if they withdraw funds, their after-tax contributions come out first. My question is whether the gains they received while in the Roth 401k are considered part of the after-tax amount, or is it just their contributions (to the Roth 401k)?
How does someone typically prove the holding period for the Roth 401k? A 401k statement, W-2, or something else? I don’t think it would show up on a 8606 or a 5498. Also, say someone had their first Roth 401k contribution 3 years prior to rolling over to a Roth IRA, does the 5 year time period start over? Thanks
The 1099R reporting the direct rollover to a Roth IRA will show the first year of Roth 401k contributions in Box 11. This also applies to non rollover distributions to the participant. If that Box 11 showed a year 3 years prior, the 5 year period starts over once in the Roth IRA unless the Roth IRA is itself qualified (5 years and 59.5). In such a case the Roth 401k funds also become qualified if the Roth IRA is qualified.
Permalink Submitted by Alan - IRA critic on Mon, 2021-08-16 22:08
Just the contributions are treated as if they were Roth IRA contributions, and that amount will show on the 1099R that reports the direct rollover in Box 5. However, if the Roth 401k had been held 5 years, then the entire amount rolled to the Roth IRA is treated as regular Roth IRA contributions, which come out of the Roth IRA first. Also, if the person had another Roth IRA, all their Roth IRAs are treated as one combined Roth IRA which would result in the Roth IRA 5 year holding period being met sooner. Once the Roth IRA becomes qualified, all amounts rolled into it are also qualified and fully tax free.