401k Roth to Roth IRA Withdrawals in Retirement

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401k Roth to Roth IRA Withdrawals in Retirement

Postby FinancialDave » Fri Jun 28, 2013 7:24 pm

There seems to be some confusion, at least in my mind, on the difference between leaving the 401k Roth money in the employer plan until it (the earnings on the contributions) is qualified (5 years from 1st entry) or rolling it out into a Roth IRA and then having to wait for the 5 year holding period (at least on the earnings).

The situation is the employer 401k Roth was only created a couple of years ago, so if I take a distribution from there the earnings would be taxable -- according to the Fidelity rep who manages the plan, no consideration is given that I have had other Roth accounts for over 15 years.

Alan S.,
Can you comment on this -- seems like when I posed this question here a couple years ago the opinion was the other Roth accounts did matter.


If it is as Fidelity suggests and the 5 year qualification period starts after the Rollover, it seems that it might be quicker to just keep the money in the employer plan for another 3 years and take it directly from there in a qualified distribution. ??

fd
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby JamesSFO » Fri Jun 28, 2013 7:28 pm

Highly commend IRS Pub 590, http://www.irs.gov/pub/irs-pdf/p590.pdf

Answer on 70 is (emphasis mine)
What Are Qualified Distributions?
A qualified distribution is any payment or distribution from
your Roth IRA that meets the following requirements.
1. It is made after the 5-year period beginning with the
first taxable year for which a contribution was made to
a Roth IRA set up for your benefit
, and
2. The payment or distribution is:
a. Made on or after the date you reach age 59 1/
2
,
b. Made because you are disabled (defined earlier),
c. Made to a beneficiary or to your estate after your
death, or
d. One that meets the requirements listed under First
home under Exceptions in chapter 1 (up to a
$10,000 lifetime limit).

...

A separate 5-year
period applies to each conversion and rollover
. See Or­
dering Rules for Distributions, later, to determine the recapture amount, if any.

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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby FinancialDave » Fri Jun 28, 2013 8:09 pm

If I read this literally, and based on my knowledge of 401k Roth distribution rules, I would take it to mean 5 years from now if I do nothing, I could withdraw the Roth money from the 401k Roth directly as a qualified distribution (as I am currently retired,) or I could roll the money over into a Roth IRA account and wait another 5 years for it to be qualified.

fd
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby FinancialDave » Fri Jun 28, 2013 8:27 pm

This seems to be the "clincher" statement from pub 590:

Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. See Converting From Any Traditional IRA Into a Roth IRA in chapter 1. Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan.


Which basically means I should just wait and take the qualified distribution from the 401k Roth.

fd
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby HueyLD » Fri Jun 28, 2013 8:29 pm

FinancialDave wrote:The situation is the employer 401k Roth was only created a couple of years ago, so if I take a distribution from there the earnings would be taxable -- according to the Fidelity rep who manages the plan, no consideration is given that I have had other Roth accounts for over 15 years.
....
If it is as Fidelity suggests and the 5 year qualification period starts after the Rollover, it seems that it might be quicker to just keep the money in the employer plan for another 3 years and take it directly from there in a qualified distribution. ??

FD,

The IRS has a FAQ that answers your question.
How is the 5-taxable-year period calculated when I roll over a distribution from a designated Roth account to a Roth IRA?

When you roll over a distribution from a designated Roth account to a Roth IRA, the period that the rolled-over funds were in the designated Roth account does not count toward the 5-taxable-year period for determining qualified distributions from the Roth IRA. However, if you had contributed to any Roth IRA in a prior year, the 5-taxable-year period for determining qualified distributions from a Roth IRA is measured from the earlier contribution. So, if the earlier contribution was made more than 5 years ago and you are over 59 ½ a distribution of amounts attributable to a rollover contribution from a designated Roth account would be a qualified distribution from the Roth IRA.

http://www.irs.gov/Retirement-Plans/Ret ... #rollovers
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby Epsilon Delta » Fri Jun 28, 2013 9:36 pm

JamesSFO wrote:Highly commend IRS Pub 590, http://www.irs.gov/pub/irs-pdf/p590.pdf

Answer on 70 is (emphasis mine)
What Are Qualified Distributions?
A qualified distribution is any payment or distribution from
your Roth IRA that meets the following requirements.
1. It is made after the 5-year period beginning with the
first taxable year for which a contribution was made to
a Roth IRA set up for your benefit
, and
2. The payment or distribution is:
a. Made on or after the date you reach age 59 1/
2
,
b. Made because you are disabled (defined earlier),
c. Made to a beneficiary or to your estate after your
death, or
d. One that meets the requirements listed under First
home under Exceptions in chapter 1 (up to a
$10,000 lifetime limit).

...
If you receive a distribution that is not a qualified distribu-
tion,
...

A separate 5-year
period applies to each conversion and rollover
. See Or­
dering Rules for Distributions, later, to determine the recapture amount, if any.



I added back part of the text that was elided. If you meet the conditions for a qualified distribution you can ignore any other five year period. So this agrees with HueyLD, which is a good thing, because the IRS is the source for both texts and we want them to be consistent.
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby Alan S. » Fri Jun 28, 2013 11:42 pm

Huey's post was most on point.

If you are seeking the first opportunity for a qualified distribution, you would take it from the account that was funded first since that account will reach the 5 year holding period first, and of course you must also be 59.5. So if your Roth IRA was funded first, rolling your designated Roth into the Roth IRA will result in the designated Roth funds being qualified before they would if left in the 401k. If the Roth 401k was funded first, leaving the plan intact would result in qualified distributions before the Roth IRA could become qualified. Therefore, if your primary Roth funding is the Roth 401k, there is benefit for starting a Roth IRA with a minimum contribution (small conversion if your MAGI is too high for regular contributions) to get the IRA clock started. That would eliminate having to "start the clock over" if your Roth 401k was not qualified and you did not want to keep it in place until it was.

When you roll a designated Roth to a Roth IRA, the funds in the Roth IRA that came from the designated Roth are treated as follows:
1) If the Roth IRA is qualified, the Roth 401k funds rolled in are also instantly qualified
2) If the Roth IRA is not qualifed, the incoming non qualified Roth 401k dollars are treated as:
a) regular Roth IRA contributions to the extent of the Roth 401k deferrals
b) Roth IRA earnings to the extent of Roth 401k earnings
c) Roth IRA conversions to the extent of In plan Roth 401k rollovers with same 5 year holding period. a,b and c subject to Roth IRA ordering rules.
3) If the Roth IRA is not qualified, the incoming qualified Roth 401k dollars are treated as regular Roth IRA contributions which will be subject to Roth IRA ordering rules

Since a non qualified Roth 401k distribution will always include a pro rated amount of earnings, rolling to a Roth IRA will result in the earnings coming out last.
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby graveday » Fri Jun 28, 2013 11:50 pm

A problem with Roth is a good problem to have. I was/am just too old to bother with the machinations to make a difference.
I did make sure my son started a Roth. Anyone remember the story where someone got up on a commuter train to effusively thank Roth himself for creating the vehicle?
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby Kalo » Fri Jun 28, 2013 11:57 pm

Sorry this might be a silly question in light of earlier posts, but I'm still confused on one thing.

If my Roth IRA has been opened more than 5 years ago, but I'm not 59.5 yet, when I roll my Roth 401k to my Roth IRA, will my entire Roth IRA (with the rolled in Roth 401k funds) then share my start period of my Roth IRA so that when I do hit 59.5 it will all be qualified for tax free withdrawals? (I just started the Roth 401k recently.)

Thanks,

Kalo
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby FinancialDave » Fri Jun 28, 2013 11:57 pm

So,
If I "play back" what I think this says with two examples:

1. My case where I have been making contributions to other Roth accounts for 15 years (and am over 60), any distribution to myself or another Roth IRA is actually a qualified distribution and the money can be spent immediately with not tax consequence.

2. For the unlucky sole who has no other Roth IRA accounts and leaves his Roth 401k money alone for 4 years and then rolls it over to a Roth IRA, he, or she, will have to wait another 5 years (for a total of 9 years from when the first money went in the account, to get it ALL tax free. <struck out>

The only potential problem that I see is how is Fidelity (401k), or Vanguard (rollover) going to get the 1099-R coded right, or does it matter?

fd
Last edited by FinancialDave on Sat Jun 29, 2013 12:59 am, edited 1 time in total.
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby FinancialDave » Sat Jun 29, 2013 12:05 am

Alan S. wrote:Huey's post was most on point.

If you are seeking the first opportunity for a qualified distribution, you would take it from the account that was funded first since that account will reach the 5 year holding period first, and of course you must also be 59.5. So if your Roth IRA was funded first, rolling your designated Roth into the Roth IRA will result in the designated Roth funds being qualified before they would if left in the 401k. If the Roth 401k was funded first, leaving the plan intact would result in qualified distributions before the Roth IRA could become qualified. Therefore, if your primary Roth funding is the Roth 401k, there is benefit for starting a Roth IRA with a minimum contribution (small conversion if your MAGI is too high for regular contributions) to get the IRA clock started. That would eliminate having to "start the clock over" if your Roth 401k was not qualified and you did not want to keep it in place until it was.

When you roll a designated Roth to a Roth IRA, the funds in the Roth IRA that came from the designated Roth are treated as follows:
1) If the Roth IRA is qualified, the Roth 401k funds rolled in are also instantly qualified
2) If the Roth IRA is not qualifed, the incoming non qualified Roth 401k dollars are treated as:
a) regular Roth IRA contributions to the extent of the Roth 401k deferrals
b) Roth IRA earnings to the extent of Roth 401k earnings
c) Roth IRA conversions to the extent of In plan Roth 401k rollovers with same 5 year holding period. a,b and c subject to Roth IRA ordering rules.
3) If the Roth IRA is not qualified, the incoming qualified Roth 401k dollars are treated as regular Roth IRA contributions which will be subject to Roth IRA ordering rules

Since a non qualified Roth 401k distribution will always include a pro rated amount of earnings, rolling to a Roth IRA will result in the earnings coming out last.


Alan,

If I roll the 401k Roth over to a completely new Roth IRA, but I have another 15 year old Roth IRA with another broker, does that make any difference or does the 401k Roth have to be rolled over directly to the qualified plan rather than it's own new IRA -- my impression is it does not matter??

fd
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby Alan S. » Sat Jun 29, 2013 12:07 am

Kalo wrote:Sorry this might be a silly question in light of earlier posts, but I'm still confused on one thing.

If my Roth IRA has been opened more than 5 years ago, but I'm not 59.5 yet, when I roll my Roth 401k to my Roth IRA, will my entire Roth IRA (with the rolled in Roth 401k funds) then share my start period of my Roth IRA so that when I do hit 59.5 it will all be qualified for tax free withdrawals? (I just started the Roth 401k recently.)

Thanks,

Kalo


Yes, your entire Roth IRA holding the rolled in Roth 401k funds will be qualified when you reach 59.5.

fd - you are correct, it does not matter which Roth IRA you roll to since all Roth IRAs are considered combined as one account for taxation of distributions (except corrective distributions).
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby FinancialDave » Sat Jun 29, 2013 12:15 am

Alan S. wrote:
Kalo wrote:Sorry this might be a silly question in light of earlier posts, but I'm still confused on one thing.

If my Roth IRA has been opened more than 5 years ago, but I'm not 59.5 yet, when I roll my Roth 401k to my Roth IRA, will my entire Roth IRA (with the rolled in Roth 401k funds) then share my start period of my Roth IRA so that when I do hit 59.5 it will all be qualified for tax free withdrawals? (I just started the Roth 401k recently.)

Thanks,

Kalo


Yes, your entire Roth IRA holding the rolled in Roth 401k funds will be qualified when you reach 59.5.

fd - you are correct, it does not matter which Roth IRA you roll to since all Roth IRAs are considered combined as one account for taxation of distributions (except corrective distributions).



Alan,
What about my question about getting the 1099R right on these rollovers where the "rollover broker has no idea about your other Roth history.

fd
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby Kalo » Sat Jun 29, 2013 12:18 am

Thanks for the answer, Alan.

Kalo
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Re: 401k Roth to Roth IRA Withdrawals in Retirement

Postby Epsilon Delta » Sat Jun 29, 2013 12:26 am

FinancialDave wrote:So,

2. For the unlucky sole who has no other Roth IRA accounts and leaves his Roth 401k money alone for 4 years and then rolls it over to a Roth IRA, he, or she, will have to wait another 5 years (for a total of 9 years from when the first money went in the account, to get it ALL tax free. And actually it is more specific than no other Roth accounts, since if the investor has only been doing rollovers, conversions or backdoor conversions because of being highly compensated and made no actual contributions to a Roth directly, I would take that to mean they have not contributed to a Roth for the purpose of qualifying for a qualified distribution.


I am pretty sure that conversions, rollovers etc. also start the clock towards qualifying the Roth. Hopefully Alan will confirm this.
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