62 yr old client has contributed to Roth and tradition 401k. If he rolls both to IRA’s and elects to do Roth conversions. should he put conversions into separate Roth due to 5 yr rule for each conversion, or is he OK to put conversions into existing Roth IRA that was rolled over from Roth 401k?
Yes, the Roth IRA has its own 5 year clock, so if there was no prior Roth IRA contribution, the 5 years will start with the Roth 401k rollover. But because the Roth 401k is already qualified, the entire amount of the rollover will be treated as regular Roth IRA contributions which can be withdrawn anytime without tax or penalty, therefore he should have no tax issues, but he would need to keep track of the amount rolled over (shown on 1099R coded H) in order to report any Roth IRA distribution in the first 5 years, even though such a distribution would be tax free.
There will be 0 Roth IRA gains to start with if there has been no prior Roth IRA, and even 4 years from now, Roth IRA gains would likely be only a small portion of the account.
Permalink Submitted by Alan - IRA critic on Wed, 2024-09-18 11:00
There is no longer a 5 year conversion holding period after 59.5. Further, all Roth IRA accounts are treated as one combined account, so taxes are not a reason to maintain more than one.
However, if the Roth 401k rollover is the first contribution to a Roth IRA there is still a 5 year holding period before the Roth earnings are qualified for tax free distribution. But there should be very little in earnings actually generated in the Roth IRA if the Roth IRA has just recently been created.
Client will have to keep track of his Roth IRA contribution basis until he has had a Roth IRA for 5 years. If the Roth 401k was started before 2020, that account is qualified and the total Roth 401k rollover amount is treated as regular Roth IRA contribution basis. If he does future Roth conversions, he will add conversion basis, so all Roth IRA distributions will be tax free up to the amount of total basis. But he will have to report any Roth IRA distributions on Form 8606 until 2029 if this is his first Roth IRA. And he will have to keep track of his Roth IRA basis until 2029 in order to complete the 8606. Much simpler if he takes no Roth IRA distributions until 2029.
Permalink Submitted by Don Warnke on Wed, 2024-09-18 12:04
The Roth 401k was established over 5 yrs ago. If he rolls that to Roth IRA, are you saying he would start a new 5 yr clock for qualified distribution?