There is an entry in the page 262 Table in Ed Slott’s NEW Retirement Savings Time Bomb book that I suspect isn’t correct. But I’d like to see what others think about this.

The entire Table (pages 261 & 262) deals with various cases of transferring Roth 401(k) funds over to Roth IRAs. The bottom row in this table deals with the case where the Roth 401(k) account contains in-plan conversions that have not yet exceeded the 5-year holding period for Sec. 72(t) penalty-free distributions. [Note – this is NOT the 5-year period for determination of qualified / nonqualified distribution status.]

According to this Table row, that 5-year holding period follows the transferred funds after they are moved to the receiving Roth IRA. EXAMPLE: In January 2021 Art makes an in-plan 401(k) conversion of all $10,000 of previous 401(k) salary deferral contributions into that plan’s Roth 401(k). In Feb. 2021 Art moves to a new employer and decides to perform a direct trustee transfer of his Roth 401(k) funds to an existing Roth IRA. According to this table row, the $10,000 of Roth 401(k) funds will be categorized as Type 2a “Conversion Contributions” (using IRS-speak) and maintain their 5-year tracking period within the Roth IRA.

However, this approach appears to contradict the regulations contained in CFR § 1.408A-10 A-3(a) Coordination between designated Roth Accounts and Roth IRAs:

“A-3. (a) Under section 408A(d)(4), distributions from Roth IRAs are deemed to consist first of regular contributions, then of conversion contributions, and finally, of earnings. For purposes of section 408A(d)(4), the amount of a rollover contribution that is treated as a regular contribution is the portion of the distribution that is treated as investment in the contract under A-6 of § 1.402A-1, and the remainder of the rollover contribution is treated as earnings. “

According to the plain reading of this regulation, funds transferred from a Roth 401(k) into a Roth IRA are divided between regular contributions and earnings within the Roth IRA. Nothing is categorized as conversion contributions.

The reference to “investment in the contract under A-6 of § 1.402A-1” means any portion of the transfer that, if instead it had been distributed to the account owner, would not be included in Gross Income and hence not subjected to income tax. Thus all $10,000 of the in-plan conversion in my previous example would qualify as “investment in the contract” and hence, according to the regulation, end up being classified as a regular contribution after the Roth 401(k) to Roth IRA transfer. But regular contributions within a Roth IRA are never subject to a 5-year period / never subject to Sec. 72(t) 10% penalty tax. If this is correct, IT IS NOT TRUE that the 5-year period follows the Roth 401(k) funds into the Roth IRA. Hence the bottom row of the Table on page 262 is incorrect.

So, what are your thoughts? Are you aware of any other regulations, IRS Notices, PLRs, etc. that modify the interpretation of CFR § 1.408A-10 A-3(a) ?