Is 10% IRS Penalty triggered on 401k In-Plan Roth Conversion?
Assumptions:
401k owner under age 59 1/2.
Owner makes $10,000 after-tax contribution to their traditional 401k.
The $10,000 after-tax contribution grows to $15,000 in value.
Then owner converts the $10,000k after-tax contribution to their Roth 401k through in-plan Roth conversion. it is understood no taxes or penalties are triggered on this part of the conversion.
The $5,000 of earnings are subject to ordinary income taxation.
Would the $5,000 of earnings be subject to the 10% IRS penalty for early withdrawal?
Thanks for your help.
Permalink Submitted by Alan - IRA critic on Mon, 2022-01-10 20:36
The taxable portion of the in plan Roth rollover is not subject to any penalty at the time of the Roth rollover. However, if these funds are distributed from the Roth 401k or from an IRA to which it is rolled before 5 years has passed including the year of the Roth rollover (or the participant reaches 59.5), the 10% penalty on the 5000 will be due at that time.