Roth 401k to Roth IRA conversions

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ChinchillaWhiplash
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Joined: Sat Jan 20, 2018 5:40 pm
Location: Land of Hypoxia

Roth 401k to Roth IRA conversions

Post by ChinchillaWhiplash »

Is this something that is a good idea? Any specifics to watch out for? As I understand it, the 5 year clock starts over when you do the rollover from 401k to IRA. Does this mean that if you have had your Roth IRA open for 3 years and you roll the 401k into it then you have to wait another 5 years to withdraw penalty free? When in your investment phase is the best time to do such a conversion? Main reason to do it is to avoid RMD. Any other good reasons? TIA :beer
Alan S.
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Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Roth 401k to Roth IRA conversions

Post by Alan S. »

ChinchillaWhiplash wrote: Wed Sep 21, 2022 10:53 pm Is this something that is a good idea? Any specifics to watch out for? As I understand it, the 5 year clock starts over when you do the rollover from 401k to IRA. Does this mean that if you have had your Roth IRA open for 3 years and you roll the 401k into it then you have to wait another 5 years to withdraw penalty free? When in your investment phase is the best time to do such a conversion? Main reason to do it is to avoid RMD. Any other good reasons? TIA :beer
The taxation rules for distributions from a Roth IRA before it is qualified are much better than a Roth 401k. If you roll a:

1) Non qualified Roth 401k into a non qualified Roth IRA, the amount you contributed to the Roth 401k are treated as regular Roth IRA contributions. These come out anytime tax and penalty free.
2) Qualified Roth 401k to non qualified Roth IRA. The entire Roth 401k balance is treated as regular Roth IRA contributions, not just the amount you contributed.
3) Either qualified or non qualified Roth 401k rolled to a qualified Roth IRA - the entire Roth IRA balance can be distributed tax and penalty free.

If you did in plan Roth rollovers in the Roth 401k, these must be held 5 years (or until 59.5 if sooner) for the taxable portion to be withdrawn without penalty in situation 1) above.

Of course, you must also consider the investment options and expenses for the Roth IRA v those of the Roth 401k. A direct rollover of a Roth 401k to a Roth IRA is always non taxable, but you must then maintain your own Roth IRA accounting to determine how a distribution from the Roth IRA will be taxed according to the above rules.
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