Distribution of Roth IRA rolled over from Roth 401k

Submitted by Maciej Rozmyslowicz on Tue, 2023-01-03 20:40

Hello,

I’m 35 years old and I rolled over my old Trad + Roth 401k to Trad IRA and Roth IRA respectively back in 2020. 401k was originally set up in 2011.

I would like to take a distribution from Roth IRA this year and from what I’ve read, it might be a subject to 10% penalty and potential taxes since it hasn’t been seasoned in Roth IRA for the full 5 years (even though the Roth 401k was well over 5 years old).

Can someone please advise on potential tax and penalty obligation in this case? I’ve read that only the earnings portion of Roth IRA can be subject to taxes but how do I figure out what amount in considered contribution and what amount is considered earnings? Do I have to go back and look at old 401k statements? The rollover to Roth IRA in 2020 was just $3,000, if I take that exact amount – is it subject to taxes/penalties – and if so, would it be on the entire $3,000?

How does not meeting retirement age requirement play into all this?

I was always under impression that I won’t need to pay any taxes on withdrawals regardless of age (since money contributed was already after tax) and the only restriction would be a penalty when not meeting 5 year rule.

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Permalink Submitted by Alan - IRA critic on Tue, 2023-01-03 21:21

The taxpayer must track their Roth IRA basis in order to report any distributions prior to when the Roth IRA becomes qualified. Such distributions are reported on Form 8606, and your regular Roth IRA contribution basis goes on line 22 and any conversion basis on line 24 if your distribution exceeds the amount on line 22. All distributions up to the amount shown on line 22 are tax and penalty free.
When your Roth 401k was rolled over into your Roth IRA in 2020, you received a 1099R. Box 5 of that 1099R will show the amount of Roth 401k contributions included in the rollover. And if the Roth 401k lost money then Box 5 could be larger than the 3000 rolled over. You should integrate that Box 5 amount into your Roth IRA basis tracking and that amount will increase your regular Roth IRA contribution basis, the amount that you would show on line 22 of the 8606. As regular Roth contribution basis, this is the amount that you can distribute from your Roth IRA tax and penalty free.
No need to look at your old 401k statements, and hopefully you still have that 1099R (coded H) that was issued in Jan, 2021 for 2020.
Should you take a Roth IRA distribution that is larger than your line 22 amount (and your line 24 amount if you did prior conversions), then you will be withdrawing gains. The amount of any gain as calculated on Form 8606 would be subject to both tax and penalty. At 59.5, your gains will also become tax and penalty free as you will also have held your Roth IRA over 5 years by then.