ROTH 401(k) Rollover to ROTH IRA

Submitted by David Berdow on Fri, 2023-05-05 12:35

Client age 61 is contributing to ROTH 401(k) (recently established) and does not have a ROTH IRA (High Income).
Goal is to rollover money to a ROTH IRA and then take all the money out tax free upon retirement in about 5-6 years.
Client owns multiple IRA’s (all pre tax contributions / no post tax contributions) established over the past three decades. If I understand correctly with the five year rule these are the steps.

1. Establish a ROTH IRA right now.
2. Rollover the ROTH 401(k) upon retirement to the ROTH IRA.

My questions are:

1. If the ROTH IRA is established now are all of the funds tax free (including the rollover) since the ROTH IRA will have been established for five years?
2. Only way to get money into a newly established ROTH IRA is to convert some of the IRA funds to the new ROTH IRA. Other then the money converted (a nominal amount to open the ROTH IRA say $250.00) which will be taxed there are no pro-rata rules taking into consider all the IRA’s and their values correct?



Submitted by Alan - IRA critic on Fri, 2023-05-05 14:28

  1. Yes. The new Roth IRA can be funded with a small taxable conversion.
  2. No pro rating since the IRAs have no basis.
  3. If client does not establish a Roth IRA until the Roth 401k rollover, the rollover will be qualified and the entire rollover will be treated as a regular Roth IRA contribution, available anytime tax and penalty free. Only earnings generated in the Roth IRA itself will be taxable if distributed in the first 5 years. Therefore client would have immediate tax free access to almost all of the Roth IRA even without opening one now.

Submitted by David Berdow on Mon, 2023-05-08 12:38

Understood thank you.In theory if the client waited a year or two and or did not take out as much in the first or second year (after retirement) is it best to establish the ROTH IRA now and will that prevent the taxation of earnings regardless of account liquidation timing.I am lookng at the most conservative way to prevent the earnings being taxed and the five year rule if this makes sense. 

Submitted by Alan - IRA critic on Mon, 2023-05-08 15:00

Yes, if there is  concern that the client would distribute a large portion of the Roth IRA in the first 5 years, it would be wise to start the Roth IRA now to complete the 5 years sooner. But it’s rare that a taxpayer would drain a large portion of the Roth IRA, particularly in the lower tax years just after retirement. But there is also a chance that the client retires before the 5 year period is completed for the Roth 401k, which would result in the earnings in the Roth 401k itself being subject to taxes in addition to earnings generated in the Roth IRA. In that case a larger portion of the Roth IRA would be subject to taxes if withdrawn in the first 5 years after the Roth IRA is established.

Submitted by David Berdow on Mon, 2023-05-08 16:31

Thank you

Submitted by David Berdow on Wed, 2023-05-10 19:55

Their accountant is saying this cannot be done without additonal taxes. Am I missing somethign here? I believe he feels this is a backdoor ROTH conversion and not just converting a small portion of one of his several IRA’s?

Submitted by Alan - IRA critic on Wed, 2023-05-10 20:12

The conversion of pre tax IRA dollars will be taxable in the year of conversion, but later distributions from the Roth IRA will be non taxable up to the amount of contributions made to the Roth 401k or conversions made to the Roth IRA. Once 5 years has passed, the entire Roth IRA balance will be non taxable. The accountant was probably referring to the conversion itself being taxable, and that is true.

Submitted by David Berdow on Wed, 2023-05-10 20:44

Yes understood. From my example nothing other than the $250 conversion from the IRA to the ROTH IRA is taxable. I believe the accountant feels this is a backdoor ROTH conversion strategy using a non deductable IRA to convert to a ROTH IRA and the pro rata rules with his other IRA’s. 

Submitted by David Berdow on Wed, 2023-05-10 20:47

The statement from the accountant is you can’t have any other traditional IRA accounts and it all has to be rolled over or it does not work. That leads be to beleive the accountant feels it is the backdoor ROTH strategy. 

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