5-year rule on a new 401k Roth

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johnmattis
Posts: 5
Joined: Fri Jan 27, 2017 7:41 pm

5-year rule on a new 401k Roth

Post by johnmattis » Thu Dec 06, 2018 5:53 pm

How can I avoid the 5-year rule on a new 401k Roth subaccount at a new employer?

For Roth accounts NOT in a 401k, the 5-year clock starts with the first deposit to ANY Roth account, and applies equally to all your Roth accounts if you open several.

401k Roth accounts are different: each 401k Roth account has its own separate 5-year clock. Most sources, including Kitces and Vanguard, agree that starting a new 5-year clock on a new 401k Roth account can be avoided if you direct rollover an old 401k to the new one.

How much of the old 401k do I have to rollover to avoid a new five-year clock in the new 401k Roth plan? Can I direct rollover less than the entire old plan?

Do I get to use the old clock if I direct rollover only the 401k Roth subaccount (but not the whole plan)? Do I get to use the old clock in the new 401k Roth if I direct rollover only $1 from the previous 401k Roth? How is this enforced?

pdavi21
Posts: 202
Joined: Sat Jan 30, 2016 4:04 pm

Re: 5-year rule on a new 401k Roth

Post by pdavi21 » Thu Dec 06, 2018 6:00 pm

An interesting question, and I won't answer it because I don't know, but why are you planning to withdraw all the cost basis from both ROTH accounts within the next 5 years? Why is it so important to you?

Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: 5-year rule on a new 401k Roth

Post by Alan S. » Thu Dec 06, 2018 7:53 pm

johnmattis wrote:
Thu Dec 06, 2018 5:53 pm
How can I avoid the 5-year rule on a new 401k Roth subaccount at a new employer?

For Roth accounts NOT in a 401k, the 5-year clock starts with the first deposit to ANY Roth account, and applies equally to all your Roth accounts if you open several.

401k Roth accounts are different: each 401k Roth account has its own separate 5-year clock. Most sources, including Kitces and Vanguard, agree that starting a new 5-year clock on a new 401k Roth account can be avoided if you direct rollover an old Roth 401k to the new one.


Yes, that is correct providing that the old Roth 401k administrator correctly transfers the old Roth 401k data to the new administrator. The 5 year clock for the new Roth 401k would then be deemed to start in the year of the first contribution to the old Roth 401k.


How much of the old 401k do I have to rollover to avoid a new five-year clock in the new 401k Roth plan? Can I direct rollover less than the entire old plan?


Yes, you can directly roll over as small a portion as you like from the old Roth 401k. Any amount will result in the new plan 5 year holding period starting in the year of the old plan.

Do I get to use the old clock if I direct rollover only the 401k Roth subaccount (but not the whole plan)? Do I get to use the old clock in the new 401k Roth if I direct rollover only $1 from the previous 401k Roth? How is this enforced?

Yes, the old clock is used. Tax tracking is the responsibility of the new plan administrator as well as 1099R reporting if you take a distribution. Of course, they will use the data transferred to them by the old administrator, so both plans need to be correct for the distribution reporting to be correct.


I don't see much benefit from going to all this trouble. Unless there are major creditor protection issues in your state for IRAs, you are better off rolling the old Roth 401k to your Roth IRA. Roth IRAs have ordering rules under which the regular contribution balance comes out first. Roth 401k plans are subject to different rules, with gains coming out pro rata with basis. If you are under 59.5 at the time of a Roth 401k distribution, you will owe tax and penalty on the amount of gains distributed regardless of how many years the account has been held.


Further, the holding period does not affect what amounts of the new Roth 401k can be distributed while still in service. Elective Roth deferrals cannot be distributed before 59.5. If you do an IRR (in plan Roth rollover), each of those IRRs will have it's own 5 year holding period with respect to the 10% penalty.

You would normally roll your Roth 401k to a Roth IRA anyway after you separate to avoid Roth 401k RMDs starting at 70.5 or right after retirement if later. When you roll over a Roth 401k to a Roth IRA, the holding period of the Roth IRA governs. The benefit of rolling a qualified Roth 401k over to a Roth IRA instead of a NQ Roth 401k being rolled over is that the entire balance rolled over will be treated as Roth IRA basis (none as Roth IRA earnings) when the Roth 401k was qualified, so you need to be 59.5 as well as meeting the 5 year holding period for the Roth 401k.


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