Roth IRA Rollover and Distribution

Submitted by Julie Brangenberg on Tue, 2023-03-07 21:10

Hello. I have a client who is 52 years old, and terminated from employer. He has a 401k with the following Sources:
Pre – Tax Deferral
Roth Deferral
Safe Harbor Non-Elective

He would like to distribute his Roth Deferral amount. What’s the best way to accomplish with tax or penalty?
Thanks!



Submitted by Alan - IRA critic on Tue, 2023-03-07 22:00

DIstribute in what form?  If distributed to himself any gains will be subject to tax and penalty. But if distributed as a direct rollover to his Roth IRA, there will be no current taxes due. A later distribution from the Roth IRA prior to 59.5 will also be non qualified, but Roth IRA distributions fall under the more favorable ordering rules, where any gains come out last.



Submitted by Julie Brangenberg on Thu, 2023-03-09 20:41

He would like to take the Roth 401k contribution amount as a payment to him.  So, should he rollover the Roth portion to a Roth IRA and the pre-tax to a Traditional IRA, and then distribute the Roth IRA 100%? Thanks!



Submitted by Alan - IRA critic on Thu, 2023-03-09 23:23

  • Yes, he should do a direct rollover of the 401k to the respective pre tax or Roth IRAs. If he then wants to take a Roth IRA distribution, he must determine what his Roth IRA basis amount is for both regular contributions and conversions. If he already has a Roth IRA, he should keep track of the basis, and when he rolls the Roth 401k into the Roth IRA, his Roth IRA regular contribution basis will increase by the amount of contributions he made to the Roth 401k. This figure will appear in Box 5 of the direct rollover 1099R coded H. This figure (plus any regular Roth IRA contribution basis that already existed) can be distributed from the Roth IRA tax and penalty free. If he takes out more than his basis he will be withdrawing gains and will owe tax and penalty on the gains.
  • But if he did not do the rollover and took a distribution directly from the Roth 401k account, any gain would be pro rated with his contributions, and he would owe tax and penalty on the gain portion regardless of how small the distribution was. This can be avoided by rolling to a Roth IRA and then taking the distribution from the Roth IRA.


Submitted by Julie Brangenberg on Fri, 2023-03-10 18:57

Would it be simplest if we open a New Roth IRA for him, instead of using his existing one that he’s been contributing to, rolling over the Roth portion of the 401k to it, and distributing his contributions from it, and leaving the gain in the Roth?



Submitted by Alan - IRA critic on Fri, 2023-03-10 22:28

That would not accomplish anything because all Roth accounts are treated as one combined account. It’s simpler to just roll the Roth 401k into the existing Roth IRA account.



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