Roth 401k rollover and taxes...

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Topic Author
red5
Posts: 794
Joined: Sun Apr 01, 2012 4:42 pm

Roth 401k rollover and taxes...

Post by red5 »

Hey folks,

I've done some searching on this and found a fairly good post that had some differing opinions, but I'll be honest, it made my head hurt. Here is my situation:

I recently conducted a roth 401k rollover into a roth IRA due to leaving company. This rollover consisted of the following:

$1740 of company match dollars (basis is $1695 but I don't think that is relevant?)
$17,957 employer post tax dollars (from a basis of $16948)

It all went directly into the roth IRA as per Vanguard recommendation. I originally thought only the $1,740 would be taxed (at my current tax rate) but I read some information that suggested the roth 401k earnings might be taxed too? This would suggest that $17957 - $16948 = $1,009 would be taxed as well? I would appreciate any information.
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JamesSFO
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Re: Roth 401k rollover and taxes...

Post by JamesSFO »

Um, the company match would have been in a traditional 401K.

The Roth 401K -> Roth IRA = no tax consequence if done correctly

Trad 401K -> Trad IRA = no tax consequence if done correctly

Trad IRA -> Roth IRA = pay taxes on conversion.

So you should only pay taxes on the company match portion conversion to Roth IRA if done correctly.
Muchtolearn
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Re: Roth 401k rollover and taxes...

Post by Muchtolearn »

james has it for the most part. Your ROTH 401K can be rolled over to a ROTH IRA as it seemed you did. Cost basis is irrelevent.
The company match would not be in a ROTH 401k. It is not allowed. You are also not allowed to roll the traditional 401k (company match) directly to a ROTH IRA> It has to first go to a rollover traditional IRA, from where you can then convert to a ROTH IRA> I know it sounds silly but that's how it is. The cost basis of this is the whole value of the account, contributions plus earnings. I am very surprised Vanguard proceeded with this and I would call them. There must have been some misunderstanding.
Topic Author
red5
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Re: Roth 401k rollover and taxes...

Post by red5 »

Okay, those seem to answer my question. Thank you very much.

Concerning the rolling over of the company match dollars: A three-way conference call with myself, Vanguard and John Hancock (401k) led to the decision to write one check containing both roth 401k money AND the company match dollars made out to Vanguard. This all went directly into the roth IRA (I don't even have a tIRA) and was based on Vanguards recommendation. I guess I assumed this was the usual way to go about things and that next January/February I'd receive tax documents from JH stating how much of that rollover was post-tax dollars.
Alan S.
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Re: Roth 401k rollover and taxes...

Post by Alan S. »

There were two direct rollovers completed here:
1) Designated Roth 401k to Roth IRA - Not taxable, and you will get a 1099R coded H in Box 7. The 1099R will also show your basis in Roth 401k deferrals in Box 5. More on that below.
2) Pre tax 401 K matching contributions and earnings to Roth IRA - this is a taxable rollover and you will receive a separate 1099R for this showing Code G and taxable amount in Box 2a.

You will report both of these direct rollovers on line 16a and 16b of Form 1040.

If you change your mind about the tax bill on the pre tax 401k rollover to a Roth IRA, you can recharacterize it to a TIRA account and eliminate the taxes. Perhaps there was misunderstanding in the VG communications if they inferred that the matching contributions would not be taxed when rolled into a Roth IRA.

With respect to your Roth IRA, you should make some notes here so you will be able to report any future Roth IRA distributions on Form 8606. You would have to know the balance of the following:
1) Your regular Roth IRA contributions (this figure is the total of your actual Roth IRA contributions plus the amount shown on the 1099R Box 5). Reduce total by any prior Roth IRA distributions you have taken from this amount.
2) Your Roth rollover and conversion amounts (this figure is the total of your prior Roth conversions if any plus the 1,740 pre tax rollover). Reduce by any prior Roth IRA distributions from conversions.

Any balance in your Roth IRA in excess of the above totals is your Roth IRA earnings, and will of course fluctuate. The earnings on the Roth 401k deferrals (1,009) are treated as Roth IRA earnings after the direct rollover.

You were correct about the 1695 being irrelevant. It is just a part of your pre tax Roth rollover of 1740.
NeedSomeAdvice
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Joined: Mon Sep 24, 2012 10:32 pm

Re: Roth 401k rollover and taxes...

Post by NeedSomeAdvice »

Alan S.,

Somewhat similar question for you, if you don't mind:

I currently have a 401k through my previous employer that includes Roth, Pre-Tax, and Company contributions. I want to rollover the entire amount into a single Roth IRA and pay the taxes using an outside account. I am 27 years old and began contributing to the Roth portion of the 401k in January of 2009. I am trying to figure out the tax implications, and I hope you can help me answer a few questions. Here are my account details:

Contributions and Earnings in Total:
Company Contributions plus Earnings: $15,000
Before Tax 401(k) Contributions plus Earnings: $10,000
After Tax 401(k) Contributions plus Earnings: $30,000 ($24,000 in actual contributions with $6,000 in earnings)

Total 401k Account Balance: $55,000

My thinking is that I will have to pay taxes on the company contribution of $15,000 and the Before Tax 401(k) balance of $10,000 that consists of contributions and earnings, for a total of $25,000 that is taxable. I have come across a few articles that implied I might have to pay taxes on the $6,000 in earnings from my Roth (After-Tax) contributions as well. In your opinion, will I have to pay taxes on the $6,000 in earnings from my Roth contributions for a total of $31,000 or should I assume that I will only owe taxes on the $25,000? If I will be taxed on the $6,000, can I just leave the $6,000 in earnings in the old 401(k) plan to allow it to grow and be withdrawn tax-free upon retirement?

My second question is regarding the use of the new Roth IRA. I am considering using the funds in the new Roth IRA for a down payment on a home in the future. Am I right in thinking that I can withdrawal the rolled-over funds from the Roth IRA in five years without any penalty or taxes? Is there any way for me to get access to the funds (penalty and tax free) before the five year period passes?

Thank you so much for your time and help. I could really use some guidance here.

Best,
NeedSomeAdvice
Topic Author
red5
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Joined: Sun Apr 01, 2012 4:42 pm

Re: Roth 401k rollover and taxes...

Post by red5 »

Alan S. wrote:There were two direct rollovers completed here:
1) Designated Roth 401k to Roth IRA - Not taxable, and you will get a 1099R coded H in Box 7. The 1099R will also show your basis in Roth 401k deferrals in Box 5. More on that below.
2) Pre tax 401 K matching contributions and earnings to Roth IRA - this is a taxable rollover and you will receive a separate 1099R for this showing Code G and taxable amount in Box 2a.

You will report both of these direct rollovers on line 16a and 16b of Form 1040.

If you change your mind about the tax bill on the pre tax 401k rollover to a Roth IRA, you can recharacterize it to a TIRA account and eliminate the taxes. Perhaps there was misunderstanding in the VG communications if they inferred that the matching contributions would not be taxed when rolled into a Roth IRA.

With respect to your Roth IRA, you should make some notes here so you will be able to report any future Roth IRA distributions on Form 8606. You would have to know the balance of the following:
1) Your regular Roth IRA contributions (this figure is the total of your actual Roth IRA contributions plus the amount shown on the 1099R Box 5). Reduce total by any prior Roth IRA distributions you have taken from this amount.
2) Your Roth rollover and conversion amounts (this figure is the total of your prior Roth conversions if any plus the 1,740 pre tax rollover). Reduce by any prior Roth IRA distributions from conversions.

Any balance in your Roth IRA in excess of the above totals is your Roth IRA earnings, and will of course fluctuate. The earnings on the Roth 401k deferrals (1,009) are treated as Roth IRA earnings after the direct rollover.

You were correct about the 1695 being irrelevant. It is just a part of your pre tax Roth rollover of 1740.

I greatly appreciated this Alan. The two 1099-Rs came in today exactly as you said.

Regarding the two balances you recommended I take notes on, it appears that
1) Contributions = $5,000 (2012) + $5,500 (2013) + $16,948 (old Roth 401k, found on box 5 of 1099-R) = $27,448
2) Conversions = $1,740 (old company match dollars from above 401k, box 1 and box 2a of 1099-R)

The two added together equals $29,811. The difference between the Roth IRA value and 29,811 is considered my earnings.

I guess I don't completely understand why that information is needed though? When it comes time to make distributions many many years from now all the money will come out the same (i.e. untaxed), right? Or would it be needed in case I take money out of the Roth IRA before retirement.

Thanks. And Alan, I appreciate your contributions to this forum.
Last edited by red5 on Wed Jan 23, 2013 5:57 am, edited 1 time in total.
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Duckie
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Re: Roth 401k rollover and taxes...

Post by Duckie »

red5 wrote:Regarding the two balances you recommended I take notes on, it appears that
1) Contributions = $5,000 (2012) + $5,500 (2013) + $16,948 (old Roth 401k, found on box 5 of 1099-R) = $27,448
2) Conversions = $1,740 (old company match dollars from above 401k, box 1 and box 2a of 1099-R)

The two added together equals $29,811. The difference between the Roth IRA value and 30,197 is considered my earnings.

I guess I don't completely understand why that information is needed though? When it comes time to make distributions many many years from now all the money will come out the same (i.e. untaxed), right? Or would it be needed in case I take money out of the Roth IRA before retirement.
Exactly. Contributions may be withdrawn at any time for any reason without taxes or penalties. Conversions have a five year clock before they may be withdrawn tax-free. Earnings may not be withdrawn tax-free (there are a couple of exceptions) until age 59.5 and after a five-year period.
Topic Author
red5
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Joined: Sun Apr 01, 2012 4:42 pm

Re: Roth 401k rollover and taxes...

Post by red5 »

Duckie wrote: Exactly. Contributions may be withdrawn at any time for any reason without taxes or penalties. Conversions have a five year clock before they may be withdrawn tax-free. Earnings may not be withdrawn tax-free (there are a couple of exceptions) until age 59.5 and after a five-year period.
Thank you. I appreciate your answer.
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