Roth 401k rollover to a Roth IRA
Client just retired and has Roth 401k assets which are qualified via 401k plan. He also has a Roth IRA but has been open only for 2 years. His 401k plan choices are horrific to be nice. He is wanting to rollover the Roth 401k assets to his Roth IRA. Does rolling over Qualified Roth 401k funds into a 2 year old Roth then require him to wait another 3 years for entire account to be deemed Qualified?
He doesn’t need any assets from plan for many years but wanting to understand the mechanics when rolling over deemed Qualified Roth 401k assets to a newly opened Roth IRA that has yet to meet its 5 year period. I’m aware he can take basis even without qualified status but want to speak accurately if entire Roth 401k rollover funds are.
Permalink Submitted by Alan - IRA critic on Fri, 2025-02-21 10:43
When a qualified Roth 401k is rolled to a Roth IRA, the entire amount of the rollover is treated as regular Roth IRA contribution basis. This amount can be withdrawn from the Roth IRA anytime without tax or penalty. The only portion of the NQ Roth IRA that will be taxed prior to the Roth IRA itself becoming qualified is the gains generated in the Roth IRA – and they come out last.
Permalink Submitted by MIKE KRUCHTEN on Sat, 2025-02-22 13:11
Would the earnings on the Roth Rollover portion be tax free immediately or all earnings must wait the 5 year period?
So if you rollover a qualified Roth 401k to a Roth IRA that is opened same day of rollover check receipt, does a 5 year clock start on earnings portion or since Roth 401k was deemed qualified there is not another 5 year requirement?
Permalink Submitted by Alan - IRA critic on Sat, 2025-02-22 14:24
Since the Roth 401k was qualified, the entire balance including the gains are tax free immediately. Only earnings actually generated in the Roth IRA will be taxable if withdrawn before the Roth IRA itself has been held 5 years.
Any NQ Roth IRA distribution must be reported on Form 8606, and that requires an accurate figure to be shown on line 22 for the regular contribution basis. The entire 401k balance rolled over will go on line 22 plus any regular Roth contributions already made to the Roth IRA. Once the Roth itself has reached 5 years, the entire balance is qualified and Form 8606 is no longer needed to report distributions.