Trying to understand Roth five-year rule

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kate1234
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Trying to understand Roth five-year rule

Post by kate1234 » Fri Dec 08, 2017 11:38 am

This is a hypothetical to help me understand better how the five-year rule works for a Roth:

Suppose a Roth was opened in 2010 with a regular contribution of $6,000. Then in 2017 came a second regular contribution of $6,500, plus a taxable conversion of $10,000. And assume the taxpayer is over 59.5 years old.

Is the entire account balance available for withdrawal in 2018? Or must the taxpayer wait five years to access the 2017 contribution, conversion, and their earnings?

Alan S.
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Re: Trying to understand Roth five-year rule

Post by Alan S. » Fri Dec 08, 2017 12:15 pm

The entire account is qualified and tax free once the person has had a Roth 5 years and also reaches 59.5. This Roth is certainly qualified now because both requirements have been met. If 59.5 was attained earlier, this Roth might have been qualified as early as 1/1/2015.

Therefore, the entire account can be withdrawn now or later entirely tax free. That said, this is a bad idea unless the person is desperate because they are sacrificing future tax free growth for the rest of their life, and even into their beneficiary's life.

While it is not necessary to know in this particular case, there are actually TWO different 5 year holding periods for a Roth IRA. The first is for the earnings to become tax free once 59.5 has also been reached, and the second is for conversions to be penalty free. The second one always ends at 59.5. If the first holding period has been met, the second one is also automatically met.

kate1234
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Re: Trying to understand Roth five-year rule

Post by kate1234 » Fri Dec 08, 2017 12:33 pm

Thanks, that helps and is a relief (since I recently made a withdrawal from the Roth then doubted myself).

In spite of your warning though, the reason we have accumulated these tIRAs and rIRAs is to spend them! My understanding is the way one chooses whether to spend first from tIRA or rIRA is based on the tax consequences that year. So in theory one could carefully calculate how much from each type of account would keep one at the preferred tax rate, or one could do a fairly large Roth conversion, then recharacterize whatever portion sent one up into the next bracket; all the while pulling expenses out of the Roth. The second way gives you time in the following year to more carefully fine tune things.

Alan S.
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Re: Trying to understand Roth five-year rule

Post by Alan S. » Fri Dec 08, 2017 12:50 pm

kate1234 wrote:
Fri Dec 08, 2017 12:33 pm
Thanks, that helps and is a relief (since I recently made a withdrawal from the Roth then doubted myself).

In spite of your warning though, the reason we have accumulated these tIRAs and rIRAs is to spend them! My understanding is the way one chooses whether to spend first from tIRA or rIRA is based on the tax consequences that year. So in theory one could carefully calculate how much from each type of account would keep one at the preferred tax rate, or one could do a fairly large Roth conversion, then recharacterize whatever portion sent one up into the next bracket; all the while pulling expenses out of the Roth. The second way gives you time in the following year to more carefully fine tune things.
Yes, assuming you intend to spend them you would be able to split the distributions in order to avoid your taxable income spilling over into the next higher bracket. You could also incorporate conversions into the process, but that would obviously add a conversion tax bill to what you plan to withdraw for your own spending. However, you better be aware of the pending tax legislation as soon as it passes because it will probably eliminate your "fine tuning" opportunity.

kate1234
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Re: Trying to understand Roth five-year rule

Post by kate1234 » Fri Dec 08, 2017 1:05 pm

Alan S. wrote:
Fri Dec 08, 2017 12:50 pm
However, you better be aware of the pending tax legislation as soon as it passes because it will probably eliminate your "fine tuning" opportunity.
Thanks, I had missed this.

zeugmite
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Re: Trying to understand Roth five-year rule

Post by zeugmite » Fri Jan 05, 2018 9:02 pm

So do I have this right for penalty-free Roth IRA withdrawal?

contributions - any time
earnings - five years from first $ into any Roth AND 59 1/2 (misc. exemptions aside)
conversions - five years from the conversion OR 59 1/2 (misc. exemptions aside)

kaneohe
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Re: Trying to understand Roth five-year rule

Post by kaneohe » Fri Jan 05, 2018 11:19 pm

compare to this table by kawill from fairmark.com site (vetted by Alan S.)
looks like your nicely summarized result agrees. Pls recheck yourself.

Re: Roth IRA Rules - Table Approach
Posted by: KAWill (IP Logged)
Date: October 14, 2010 11:57PM


Roth IRA Distribution Table

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD NOT MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-Yes (Taxable Portion)
Conversions: Tax-No ;Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

UNDER AGE 59.5
FIVE YEAR CONVERSION HOLDING PERIOD MET

Contributions: Tax-No; Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-Yes

OVER AGE 59.5
LESS THAN FIVE YEARS SINCE OPENING FIRST ROTH IRA

Contributions: Tax-No ;Penalty-No
Conversions: Tax-No; Penalty-No (Taxable Portion)
Conversions: Tax-No; Penalty-No (Nontaxable Portion)
Earnings: Tax-Yes; Penalty-No

OVER AGE 59.5
FIVE YEARS OR MORE SINCE OPENING FIRST ROTH IRA

All Distributions Are Qualified

No Taxes
No Penalties

Note: The table is not applicable to timely distributions of excess contributions or return of regular contributions.

pmdonca
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Re: Trying to understand Roth five-year rule

Post by pmdonca » Sat Jan 06, 2018 1:21 am

I have a question with regards to Roth IRA withdrawals before age 59.5. How does the money come out of the Roth IRA account if the monies within the Roth IRA account has a mixture of contributions, conversions (via back door roth), and earnings? For example, could one say leave the earnings in the account and I only want to pull out the contribution amount? Or does it have be done on a pro-rata basis? Thank you for your time and knowledge.

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Epsilon Delta
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Re: Trying to understand Roth five-year rule

Post by Epsilon Delta » Sat Jan 06, 2018 1:45 am

pmdonca wrote:
Sat Jan 06, 2018 1:21 am
I have a question with regards to Roth IRA withdrawals before age 59.5. How does the money come out of the Roth IRA account if the monies within the Roth IRA account has a mixture of contributions, conversions (via back door roth), and earnings? For example, could one say leave the earnings in the account and I only want to pull out the contribution amount? Or does it have be done on a pro-rata basis? Thank you for your time and knowledge.
The IRS has ordering rules, they are deterministic (i.e. you don't have a choice) but they usually give a favorable treatment.
Roughly the order is:
Contributions first.
Conversions next, earliest year of conversion first.
Earning last.

kaneohe
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Re: Trying to understand Roth five-year rule

Post by kaneohe » Sat Jan 06, 2018 2:01 am

pmdonca wrote:
Sat Jan 06, 2018 1:21 am
I have a question with regards to Roth IRA withdrawals before age 59.5. How does the money come out of the Roth IRA account if the monies within the Roth IRA account has a mixture of contributions, conversions (via back door roth), and earnings? For example, could one say leave the earnings in the account and I only want to pull out the contribution amount? Or does it have be done on a pro-rata basis? Thank you for your time and knowledge.
very good question and sorry for leaving out some important conditions to the table. Here is a simplified version (I realized reading the IRS Pub 590B which has some examples, that it can get a bit hairy w/ recharacterizations). The withdrawals follow the IRS ordering rules which is the same order in the table above. First you only have 1 large Roth regardless of how many different account you have for the ordering process so the separate accounts make no difference if you are the owner. Add all your original contributions together. These come out first. Next come conversions, oldest first and within each conversion, the taxable part comes out first, then the non-taxable part, and then finally earnings. I think you can see
how important record keeping can be if you will be withdrawing from the Roth before it becomes fully qualified.

Here is a link that hopefully will help: http://retirementlc.com/wp-content/uplo ... -Rules.pdf Note that this link uses the word "qualified" in what I believe to be a "non-standard" way but it illustrates the concepts anyway.

lostmonkey007
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Re: Trying to understand Roth five-year rule

Post by lostmonkey007 » Sat Jan 06, 2018 12:05 pm

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libralibra
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Re: Trying to understand Roth five-year rule

Post by libralibra » Sat Jan 06, 2018 1:38 pm

A Roth is a Roth, so in your example you have no Conversion assets and should only look at the Contributions and Earnings lines. However, this brings up the question whether you pass the 5-year rule if your old Roth 401k was already 5 years old. From the way the rules are quoted above, it sounds like "no" - unless you had already opened a Roth IRA 5 years ago.

lostmonkey007
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Re: Trying to understand Roth five-year rule

Post by lostmonkey007 » Sat Jan 06, 2018 2:27 pm

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kaneohe
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Re: Trying to understand Roth five-year rule

Post by kaneohe » Sat Jan 06, 2018 2:50 pm

I don't really know the answer about rollover from Roth 401K to Roth IRA but I am inclined to believe what libralibra says:
that the age of the Roth 401K assets restarts when you transfer to Roth IRA......either taking on age of oldest Roth IRA if pre-existing or restarting at
0 yrs if no other Roth exists. .......and I am guessing that contributions to Roth 401K are considered contributions to Roth IRA and earnings in Roth 401K are considered earnings in Roth IRA. Still just guesses..........wait and see what Alan S. says.


https://www.investopedia.com/articles/r ... llover.asp
"From Roth 401(k) to IRA
If the rollover is to a Roth IRA instead, the holding period within the Roth 401(k) does not carry over. That is, if the client has an existing Roth IRA, once the Roth 401(k) distribution is in the account, it has the same holding period as the Roth IRA funds. Let's assume, for example, that the Roth IRA was opened in 2000. You worked at your employer from 2006-2009 and were then let go or quit. Because the Roth IRA that you are rolling the funds into has been in existence for more than five years, the full distribution rolled into the Roth IRA meets the five-year rule for qualified distributions. On the other hand, if you did not have an existing Roth IRA and had to establish one for purposes of the rollover, the five-year period begins the year the Roth IRA was opened, regardless of how long you have been contributing to the Roth 401(k)."

lostmonkey007
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Re: Trying to understand Roth five-year rule

Post by lostmonkey007 » Sat Jan 06, 2018 3:54 pm

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kaneohe
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Re: Trying to understand Roth five-year rule

Post by kaneohe » Sat Jan 06, 2018 4:08 pm

again, I don't pretend to know this situation, but be careful and precise about your words......there are after tax contributions to 401K and there are Roth 401K contributions and they are not identical. In your last post, you use both terms....so wondering which one is the correct one? One part I am not sure about..........are Roth 401K contributions rolled over to Roth IRA considered contributions to Roth IRA? If so , seems like you should be able to withdraw them immediately w/o that 5 yr wait regardless of how old the Roth IRA is. Again, Alan S. knows.

lostmonkey007
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Re: Trying to understand Roth five-year rule

Post by lostmonkey007 » Sat Jan 06, 2018 4:22 pm

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Alan S.
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Re: Trying to understand Roth five-year rule

Post by Alan S. » Sat Jan 06, 2018 6:32 pm

lostmonkey007 wrote:
Sat Jan 06, 2018 4:22 pm
kaneohe wrote:
Sat Jan 06, 2018 4:08 pm
again, I don't pretend to know this situation, but be careful and precise about your words......there are after tax contributions to 401K and there are Roth 401K contributions and they are not identical. In your last post, you use both terms....so wondering which one is the correct one? One part I am not sure about..........are Roth 401K contributions rolled over to Roth IRA considered contributions to Roth IRA? If so , seems like you should be able to withdraw them immediately w/o that 5 yr wait regardless of how old the Roth IRA is. Again, Alan S. knows.
All good. I was speaking about BOTH Roth 401k and after-tax 401k dollars. My company's plan allows after-tax 401k contribution up to the $55k limit. I wouldn't touch the Roth 401k dollars until I end my employment. However, my after-tax 401k contributions I can get into my Roth IRA while still employed. The mega backdoor Roth IRA as it's popularly known.
Once your mega back door is in the Roth IRA, it is treated as a partially taxable conversion for that year. If you take a Roth IRA distribution and if the ordering rules discussed earlier result in your withdrawing this Roth rollover in the first 5 years (and you are not yet 59.5), the small taxable portion (earnings on the after tax contributions) come out first and are subject to the 10% penalty. The AT contributions come out next penalty free.

Regardless of the source of rollovers into your Roth IRA, they all must be integrated into the Roth IRA ordering rules if your Roth IRA is not yet qualified. The ordering rules do not change, the tricky part is placing the funds rolled over into the correct "pot" for purposes of executing the ordering rules.

Probably the most complex situation you would have is when you make AT non Roth contribution to your 401k, then you do an IRR (in plan Roth rollover) to your non qualified Roth 401k because your plan decided to eliminate in service distributions outside the plan. Then you get a new job and can do a direct rollover of your Roth 401k to your Roth IRA, and now have to integrate all these rollover sources into your Roth IRA accounting (unless you are dead sure that you won't touch your Roth IRA until it is qualified).

1) Any elective deferrals you made to your Roth 401k are treated as if they were regular Roth IRA contributions and get added to your pot of regular Roth IRA contributions. (If your Roth 401k happened to be qualified, then the entire balance from the Roth 401k is considered regular IRA contributions). The 1099R from the plan for the Roth IRA rollover will show the amount of your Roth deferrals, and the amount of IRRs under 5 years, but NOT a breakdown by year or by the taxable vrs non taxable amounts. You will have to determine that from the 1099R issued in the year you did the IRR.
2) The IRR you made from the AT sub account is treated as a Roth IRA conversion of the same age as when you did the IRR and that means it is treated the same as if you moved the after tax 401k sub account with its earnings directly to the Roth IRA. You have to hold the taxable portion of these rollovers for 5 years to avoid the 10% penalty, and that includes time in the Roth 401k plus time in the Roth IRA.

Again, rolling over a QUALIFIED Roth 401k into a Roth IRA cannot make your Roth IRA qualified. But since the entire Roth 401k balance will be treated as included in the pot of regular Roth IRA contributions, you can still tap it tax and penalty free anytime. That includes earnings that were in the qualified Roth 401k before the rollover. However, earnings generated on these funds after they are in the Roth IRA are not tax free until the Roth IRA itself becomes qualified.

The upshot here is not to let your Roth IRA accounting get out of control or you will have to reconstruct things if you want to know the tax impact of a distribution your plan, especially if that distribution is more than the regular Roth IRA Contributions you know that you made directly to your Roth IRA.

Of course, you will never take a Roth IRA non qualified distribution anyway, right? :)

lostmonkey007
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Re: Trying to understand Roth five-year rule

Post by lostmonkey007 » Sat Jan 06, 2018 6:55 pm

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mouth
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Re: Trying to understand Roth five-year rule

Post by mouth » Sat Jan 06, 2018 8:26 pm

How about this if I may pop in with a slightly tangential question:

For reasons not important to go into here, I can't say for sure exactly how much I've contributed ... Does the IRS know? How will they know when I've withdrawn them all and moved into earnings?

Alan S.
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Re: Trying to understand Roth five-year rule

Post by Alan S. » Sat Jan 06, 2018 9:21 pm

lostmonkey007 wrote:
Sat Jan 06, 2018 6:55 pm
Alan S. wrote:
Sat Jan 06, 2018 6:32 pm
lostmonkey007 wrote:
Sat Jan 06, 2018 4:22 pm
kaneohe wrote:
Sat Jan 06, 2018 4:08 pm
again, I don't pretend to know this situation, but be careful and precise about your words......there are after tax contributions to 401K and there are Roth 401K contributions and they are not identical. In your last post, you use both terms....so wondering which one is the correct one? One part I am not sure about..........are Roth 401K contributions rolled over to Roth IRA considered contributions to Roth IRA? If so , seems like you should be able to withdraw them immediately w/o that 5 yr wait regardless of how old the Roth IRA is. Again, Alan S. knows.
All good. I was speaking about BOTH Roth 401k and after-tax 401k dollars. My company's plan allows after-tax 401k contribution up to the $55k limit. I wouldn't touch the Roth 401k dollars until I end my employment. However, my after-tax 401k contributions I can get into my Roth IRA while still employed. The mega backdoor Roth IRA as it's popularly known.
Once your mega back door is in the Roth IRA, it is treated as a partially taxable conversion for that year. If you take a Roth IRA distribution and if the ordering rules discussed earlier result in your withdrawing this Roth rollover in the first 5 years (and you are not yet 59.5), the small taxable portion (earnings on the after tax contributions) come out first and are subject to the 10% penalty. The AT contributions come out next penalty free.

Regardless of the source of rollovers into your Roth IRA, they all must be integrated into the Roth IRA ordering rules if your Roth IRA is not yet qualified. The ordering rules do not change, the tricky part is placing the funds rolled over into the correct "pot" for purposes of executing the ordering rules.

Probably the most complex situation you would have is when you make AT non Roth contribution to your 401k, then you do an IRR (in plan Roth rollover) to your non qualified Roth 401k because your plan decided to eliminate in service distributions outside the plan. Then you get a new job and can do a direct rollover of your Roth 401k to your Roth IRA, and now have to integrate all these rollover sources into your Roth IRA accounting (unless you are dead sure that you won't touch your Roth IRA until it is qualified).

1) Any elective deferrals you made to your Roth 401k are treated as if they were regular Roth IRA contributions and get added to your pot of regular Roth IRA contributions. (If your Roth 401k happened to be qualified, then the entire balance from the Roth 401k is considered regular IRA contributions). The 1099R from the plan for the Roth IRA rollover will show the amount of your Roth deferrals, and the amount of IRRs under 5 years, but NOT a breakdown by year or by the taxable vrs non taxable amounts. You will have to determine that from the 1099R issued in the year you did the IRR.
2) The IRR you made from the AT sub account is treated as a Roth IRA conversion of the same age as when you did the IRR and that means it is treated the same as if you moved the after tax 401k sub account with its earnings directly to the Roth IRA. You have to hold the taxable portion of these rollovers for 5 years to avoid the 10% penalty, and that includes time in the Roth 401k plus time in the Roth IRA.

Again, rolling over a QUALIFIED Roth 401k into a Roth IRA cannot make your Roth IRA qualified. But since the entire Roth 401k balance will be treated as included in the pot of regular Roth IRA contributions, you can still tap it tax and penalty free anytime. That includes earnings that were in the qualified Roth 401k before the rollover. However, earnings generated on these funds after they are in the Roth IRA are not tax free until the Roth IRA itself becomes qualified.

The upshot here is not to let your Roth IRA accounting get out of control or you will have to reconstruct things if you want to know the tax impact of a distribution your plan, especially if that distribution is more than the regular Roth IRA Contributions you know that you made directly to your Roth IRA.

Of course, you will never take a Roth IRA non qualified distribution anyway, right? :)
Can you clarify what it means for a Roth 401k or Roth IRA to be QUALIFIED?

It means that the entire account balance including earnings are tax free. Requirements are 5 years AND age 59.5.

Your line here: "Once your mega back door is in the Roth IRA, it is treated as a partially taxable conversion for that year. If you take a Roth IRA distribution and if the ordering rules discussed earlier result in your withdrawing this Roth rollover in the first 5 years (and you are not yet 59.5), the small taxable portion (earnings on the after tax contributions) come out first and are subject to the 10% penalty. The AT contributions come out next penalty free."

This is straight-forward enough and I hope this is mostly what I would be doing.

Now let's consider the convoluted via Roth 401k capital routes:

Your line here: "But since the entire Roth 401k balance will be treated as included in the pot of regular Roth IRA contributions, you can still tap it tax and penalty free anytime. That includes earnings that were in the qualified Roth 401k before the rollover."

That's really interesting. I would have thought the earnings in the Roth 401k account (even after the Roth 401k has become qualified) would continue to be considered earnings even after being rolled into the Roth IRA. But you're saying all Roth 401k dollars (including earnings on Roth 401k deferrals as well as earnings that have generated from IRR funds, both the after-tax contributions and prior earnings while funds were still in the after-tax 401k sub-account) would be considered Roth IRA contributions? The only piece that one would need to be careful with would be the after-tax earnings that were converted into Roth 401k dollars via IRR.

Yes, because once the Roth 401k became qualified, it could be completely distributed tax free. It would not make sense to have a rollover to a Roth IRA result in any already qualified amounts becoming pre tax again, or no one would do this rollover. And once a Roth 401k becomes qualified, the 5 year holding requirement for the taxable portion of an IRR is also moot as participant would be over 59.5.

Your line here: "You will have to determine that from the 1099R issued in the year you did the IRR" in regard to converting after-tax 401k contributions and earnings into Roth 401k dollars. What you're saying is, if we're under 5 years from when I did an IRR, the earnings, despite being converted to post-tax when I moved them into the Roth 401k account, will have to be treated as non-qualified converted dollars even after they are rolled to a Roth IRA. And a follow-up question, what about earnings I make on converted IRR after-tax sub-account earnings (after they've been transferred into the Roth 401k and I've already paid taxes on them during IRR)?

IRR money will never be taxed again, but are subject to the 5 year holding requirement for IRRs or conversions for the taxable portion of the IRR, which in your case would be the earnings in the AT sub account. Withdrawing the taxable portion of the IRR would result in a 10% penalty in the first 5 years, but no taxes. Your last question above addresses earnings you converted in the IRR, not earnings generated afterward in the Roth 401k. These earnings will never be taxed again, since you already paid taxes on them. The only amount due is the 10% penalty on them for the first 5 years if they are distributed during that time. Earnings generated IN the Roth 401k itself remain taxable until either the Roth 401k becomes qualified or if the Roth IRA rollover is done before that, until the Roth IRA itself becomes qualified.

2018: Do an IRR of $29k of after-tax contributions and $1k after-tax earnings to Roth 401k. I go ahead and pay taxes on the $1k. 2018 1099R is generated reflecting transfer $30k IRR, $1k of which was taxable.
That is correct.

2019: I leave the company. Rollover my entire Roth 401k into a Roth IRA. The funds that transfer will include:
+ Roth 401k Deferrals
+ Earnings on Roth 401k Deferrals
+ IRR After-Tax Contributions (Actually these were AT sub account contributions)
+ IRR After-Tax Earnings (on which I had to pay taxes already as part of the IRR) (And these were AT sub account earnings)

When all of this money reaches me Roth IRA, here is the withdrawal order: ( Group 1 - Roth IRA Contributions
+ Roth 401k Deferrals: immediately available, no tax, no penalty (This indicates that you are assuming the Roth 401k was not yet qualified or Roth 401k earnings would have been included here))
+ IRR After-tax contribution: immediately available, no tax, no penalty (Second out is the pre tax portion of the IRR (1,000) which would be subject to penalty in the first 5 years, 3rd out would be the non taxable part of the IRR of 29k)
+ Earnings on Roth 401k Deferrals: immediately available, because "since the entire Roth 401k balance will be treated as included in the pot of regular Roth IRA contributions, you can still tap it tax and penalty free anytime. That includes earnings that were in the qualified Roth 401k before the rollover." --> I guess key point here is what's the requirement in order for my Roth 401k to be considered qualified? (appears that now you are treating the Roth 401k as if it was qualified. The entire balance is only treated as regular IRA contributions if the Roth 401k was qualified, otherwise only the Roth 401k elective deferrals are treated as regular Roth IRA contributions.
+ Earnings on IRR funds (both the a/t contributions and a/t earnings at time of IRR): Same as earnings on Roth 401k deferrals?
Yes, earnings from whatever source generated IN the Roth 401k are treated as Roth IRA earnings if neither is qualified. If the Roth 401k was qualified, but the Roth IRA is not, then Roth 401k earnings (in fact the entire Roth 401k balance) is treated as regular Roth IRA contributions.

Group 3 - Roth IRA Conversions, i.e. after-tax earnings at time of IRR if under 5 years since IRR
+ IRR After-tax earnings: If it's been less than 5 years since IRR, then need to wait till it's been 5 years since the IRR to avoid penalty
RIght.

Alan S.
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Re: Trying to understand Roth five-year rule

Post by Alan S. » Sat Jan 06, 2018 9:33 pm

mouth wrote:
Sat Jan 06, 2018 8:26 pm
How about this if I may pop in with a slightly tangential question:

For reasons not important to go into here, I can't say for sure exactly how much I've contributed ... Does the IRS know? How will they know when I've withdrawn them all and moved into earnings?
You are asking here about a Roth IRA, not a Roth 401k I assume.

When you make a regular Roth IRA contribution or do a Roth conversion, the Roth custodian reports these on a Form 5498 each year. Then it is up to the IRS to compare their records with your Form 8606 reporting a distribution to determine if your 8606 is accurate. If the IRS can handle that part correctly, you obviously have moved into earnings distributions after your regular Roth basis and your conversion Roth basis has been drawn down. The IRS has the computer matching tools to monitor taxpayer Roth distribution reporting, but their actual application of these tools is spotty. I never hear from a taxpayer who says the IRS has questioned their 8606 basis amount (line 22 or 24) and that is quite remarkable when you consider that the average Roth owner has no idea what their basis is. However, those that use the same tax program or preparer continuously and provide the info annually, the tax program will do the job of the IRS and prepare the Form correctly. If the taxpayer changes preparers and tax programs, their formerly up to date accounting can easily be lost.

mouth
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Re: Trying to understand Roth five-year rule

Post by mouth » Sat Jan 06, 2018 11:22 pm

Alan S. wrote:
Sat Jan 06, 2018 9:33 pm
mouth wrote:
Sat Jan 06, 2018 8:26 pm
How about this if I may pop in with a slightly tangential question:

For reasons not important to go into here, I can't say for sure exactly how much I've contributed ... Does the IRS know? How will they know when I've withdrawn them all and moved into earnings?
You are asking here about a Roth IRA, not a Roth 401k I assume.

When you make a regular Roth IRA contribution or do a Roth conversion, the Roth custodian reports these on a Form 5498 each year. Then it is up to the IRS to compare their records with your Form 8606 reporting a distribution to determine if your 8606 is accurate. If the IRS can handle that part correctly, you obviously have moved into earnings distributions after your regular Roth basis and your conversion Roth basis has been drawn down. The IRS has the computer matching tools to monitor taxpayer Roth distribution reporting, but their actual application of these tools is spotty. I never hear from a taxpayer who says the IRS has questioned their 8606 basis amount (line 22 or 24) and that is quite remarkable when you consider that the average Roth owner has no idea what their basis is. However, those that use the same tax program or preparer continuously and provide the info annually, the tax program will do the job of the IRS and prepare the Form correctly. If the taxpayer changes preparers and tax programs, their formerly up to date accounting can easily be lost.
Yes Roth IRA and ... THANK YOU. :sharebeer I have decent records from Vanguard going back a time, which is also probably the bulk of my contributions + backdoor conversions. But there are some earlier dark days of First Command / USPA-IRA that I don't have the records for nor the tax records. But your response makes me feel a little less itchy :D

terran
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Re: Trying to understand Roth five-year rule

Post by terran » Tue Jan 09, 2018 12:33 am

I have a similar question, that I think Alan S. has probably already answered above, but I'm having a hard time parsing it all out.

Suppose I make an in plan Roth conversion of the after-tax source of a 403(b). I subsequently roll that Roth 403(b) over into a Roth IRA. During this time I have also contributed directly to the Roth IRA, converted deductible IRA contributions to Roth IRA and paid tax, and converted non-deductible IRA contributions and gains to Roth IRA paying tax on the gains. Before 59.5 what and when can I withdraw tax and penalty free? And in what order is it withdrawn?

> After-tax 403(b) basis which is converted in plan to Roth 403(b), then later rolled over to Roth IRA: Can be withdrawn tax and penalty free 5 years after the in plan conversion? Or does rolling over to Roth IRA start a new 5 year clock?
> After-tax 403(b) gains which are converted in plan to Roth 403(b), taxes paid, then later rolled over to Roth IRA: Can be withdrawn tax and penalty free 5 years after the conversion? Same question about whether rolling over to Roth IRA starts a new 5 year clock?
> Roth 403(b) gains which are later rolled over to Roth IRA: Can be withdrawn tax and penalty free 5 years after the rollover? Or is a penalty due until 59.5 like Roth IRA gains?
> Roth IRA Contributions: tax and penalty free immediately (this one I'm pretty sure about).
> Deductible traditional IRA converted to Roth IRA, taxes paid: Can be withdrawn tax and penalty free 5 years after the conversion (pretty sure about this one too).
> Non-Deductible traditional IRA converted to Roth IRA, taxes paid on gains: Can be withdrawn tax and penalty free 5 years after conversion (also pretty sure about this one).
>Roth IRA gains on direct contributions, all amounts rolled over from 403(b), and amounts rolled over from deductible and non-deductible IRA: tax free, but penalty until 59.5?

As far as ordering: Direct contributions > Deductible IRA conversions > non-deductible IRA gain conversions > Roth 403(b) rollover > non-deductible IRA contribution conversions > Roth 403(b) gains > Roth IRA gains. If this is all true, then I could conceivably "block" an otherwise tax and penalty free Roth 403(b) rollover (5 years since in-plan conversion) with a deductible IRA or non-deductible IRA gain conversion (less than 5 years since conversion)?

kaneohe
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Re: Trying to understand Roth five-year rule

Post by kaneohe » Tue Jan 09, 2018 9:46 am

terran wrote:
Tue Jan 09, 2018 12:33 am
I have a similar question, that I think Alan S. has probably already answered above, but I'm having a hard time parsing it all out.

Suppose I make an in plan Roth conversion of the after-tax source of a 403(b). I subsequently roll that Roth 403(b) over into a Roth IRA. During this time I have also contributed directly to the Roth IRA, converted deductible IRA contributions to Roth IRA and paid tax, and converted non-deductible IRA contributions and gains to Roth IRA paying tax on the gains. Before 59.5 what and when can I withdraw tax and penalty free? And in what order is it withdrawn?

..............................................
> Roth IRA Contributions: tax and penalty free immediately (this one I'm pretty sure about).
> Deductible traditional IRA converted to Roth IRA, taxes paid: Can be withdrawn tax and penalty free 5 years after the conversion (pretty sure about this one too).
> Non-Deductible traditional IRA converted to Roth IRA, taxes paid on gains: Can be withdrawn tax and penalty free 5 years after conversion (also pretty sure about this one).
>Roth IRA gains on direct contributions, ........................., and amounts rolled over from deductible and non-deductible IRA: tax free, but penalty until 59.5? TAXES ALSO UNDER 59.5; AFTER 59.5 TAXES UNLESS OLDEST ROTH 5 Y.O.

As far as ordering: Direct contributions > Deductible IRA conversions > non-deductible IRA gain conversions > ......... > non-deductible IRA contribution conversions > ................ > Roth IRA gains. If this is all true, then I could conceivably "block" an otherwise tax and penalty free Roth 403(b) rollover (5 years since in-plan conversion) with a deductible IRA or non-deductible IRA gain conversion (less than 5 years since conversion)?
This stuff is complicated enough w/o the qualified plan (403B/401K) stuff. Just commenting on the IRA part......Some comments in CAPS
above. Your terminology is different than that in the table. The table says taxable part of TIRA conversion and non-taxable part of TIRA conversion.
1) You say deductible IRA conversion..........both TIRA contribution and gain are taxable upon conversion.
2) You say non-deductible IRA gain conversion .......this gain is taxable upon conversion
Since both 1) and 2) are taxable part of IRA conversion, I don't believe there is any difference in ordering between the two....they are both just gains or earnings.

Yours is a noble attempt to integrate the qualified plan (after tax and Roth versions of 401K/403B ) into the kawill Roth IRA table which would be a great service to all. I will let Alan S. comment on that part and point out any errors I may have introduced.

Edit to add: just to clarify the ordering rules about conversions. Conversions are considered to come out after contributions by age (oldest first) and within each conversion , taxable part comes out first before non-taxable part. So if you have a number of conversions C and the taxable part is called CT and the non-taxable part CN........you could have CT1, CN1,CT2, CN2,CT3, CN3,etc. and they would come out after contributions in that order. They do not come out CT1, CT2, CT3,etc and then CN1, CN2, CN3 so any "blocking" of funds from 401K would be dependent on the timing of when they were considered converted relative to any TIRA conversions. Also the CT components could be relatively small if you were converting non-taxable contributions.

Alan S.
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Re: Trying to understand Roth five-year rule

Post by Alan S. » Tue Jan 09, 2018 11:35 pm

For those wondering about the cite for the 5 year conversion period continuing from the year of the IRR if a Roth IRA rollover was done before 5 years were completed from the IRR year, it is the bolded sentence in Q 12 of IRS Notice 2010-84 copied below:
Q-12. Are there any special rules relating to the application of the 10% additional tax under § 72(t) for distributions allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5 years?

A-12. Yes, pursuant to §§ 402A(c)(4)(D) and 408A(d)(3)(F), if an amount allocable to the taxable amount of an in-plan Roth rollover is distributed within the 5-taxable-year period beginning with the first day of the participant’s taxable year in which the rollover was made, the amount distributed is treated as includible in gross income for the purpose of applying § 72(t) to the distribution. The 5taxable-year period ends on the last day of the participant’s fifth taxable year in the period. Thus, if a participant withdraws an amount that includes $6,000 allocable to the taxable amount of an in-plan Roth rollover made within the preceding 5 years, the $6,000 is treated as includible in the participant’s gross income for purposes of applying § 72(t) to the distribution. In such a case, the participant would owe an additional tax of $600 unless an exception under § 72(t)(2) applies. The 5-year recapture rule in this Q&A-12 does not apply to a distribution that is rolled over to another designated Roth account of the participant or to a Roth IRA owned by the participant; however, the rule does apply to subsequent distributions made from such other designated Roth account or Roth IRA within the 5-taxable-year period. For purposes of this Q&A-12, the rules in § 1.408A-6, Q&A-5, on the application of § 72(t) also apply. See Q&A-13 of this notice for rules on allocating distributions to the taxable amount of in-plan Roth rollovers.
This means that when you are documenting the composition of your Roth IRA after rolling over a Roth 401k, treat rolled over IRR money from a Roth 401k as if it was a Roth IRA conversion done in the year the IRR was done and not the year the Roth 401k was rolled to the Roth IRA.

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