roth 401k --> roth IRA tax question

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privatefarmer
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roth 401k --> roth IRA tax question

Post by privatefarmer » Sun Feb 11, 2018 9:19 am

If I roll over 100k from a roth 401k --> roth IRA, and 20k of that is earnings (80k is my contributions), after it has been converted to a roth IRA is it ALL considered "contributions"? If I wanted to withdrawal the 100k from the roth IRA before age 59 1/2, 5 years after the conversion, would I be able to tax/penalty free? Thanks!

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grabiner
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Re: roth 401k --> roth IRA tax question

Post by grabiner » Sun Feb 11, 2018 9:33 am

Earnings and contributions retain their status when you roll a Roth 401(k) to a Roth IRA. You can withdraw contributions (including contributions made to a Roth 401(k) from a Roth IRA tax-free and penalty-free because they have already been taxed, but if you withdraw earnings before age 59-1/2, you owe tax and penalty.

The 5-year rule for conversions applies to conversions from a traditional account to a Roth IRA. The amount of the conversion has already been taxed, so there will be no tax if you withdraw it. However, there is a 10% penalty if you withdraw the taxed part of the conversion within 5 years and before age 59-1/2. This is to prevent you from converting a traditional IRA to a Roth IRA and withdrawing the money immediately to get around the 10% penalty on premature withdrawals from a traditional IRA.

The 5-year rule would allow you to do what you are considering with a traditional 401(k), but it would be costly. If you rolled $100K from a traditional 401(k) to a Roth IRA, you would pay tax on the entire $100K at that time; there would be no penalty but a conversion that large would probably be taxed at a higher rate than your regular tax bracket. Then, after five years, you could withdraw the $100K from your Roth IRA tax-free and penalty-free.
Wiki David Grabiner

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privatefarmer
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Re: roth 401k --> roth IRA tax question

Post by privatefarmer » Sun Feb 11, 2018 9:39 am

grabiner wrote:
Sun Feb 11, 2018 9:33 am
Earnings and contributions retain their status when you roll a Roth 401(k) to a Roth IRA. ...

Thanks! So my next question is, does the IRS keep track of how much in contributions were made to a roth 401k many years ago or is this something that I am going to have to furnish documentation for? thanks

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grabiner
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Re: roth 401k --> roth IRA tax question

Post by grabiner » Sun Feb 11, 2018 9:45 am

privatefarmer wrote:
Sun Feb 11, 2018 9:39 am
grabiner wrote:
Sun Feb 11, 2018 9:33 am
Earnings and contributions retain their status when you roll a Roth 401(k) to a Roth IRA. ...

Thanks! So my next question is, does the IRS keep track of how much in contributions were made to a roth 401k many years ago or is this something that I am going to have to furnish documentation for? thanks
Your payroll department should have the numbers while the money is still in the 401(k); they need to know what to report to the IRS if you withdraw prematurely from the Roth 401(k). I believe they would report those numbers on the 1099-R when you roll the Roth 401(k) into a Roth IRA. You would then need to keep this 1099-R for your own records in order to compute the correct tax on any withdrawals.
Wiki David Grabiner

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