marcopolo wrote: ↑
Tue May 15, 2018 11:09 pm
Lyrrad wrote: ↑
Tue May 15, 2018 9:47 pm
marcopolo wrote: ↑
Tue May 15, 2018 9:12 pm
There are different 5 year rules for Roth contributions and Roth conversions. For contributions, the principle can be withdrawn anytime, only the earnings are subject to penalty prior to 5 years, as you stated. For conversions, even the principle is subject to the 5 year rule.
I could be mistaken on this, but I believe an after-tax rollover from 401k plan is considered a conversion for the purposes of the 5 year rule.
I was researching this earlier and found this thread useful in working out what monies were subject to penalty and when the penalty would expire: viewtopic.php?t=248371
My understanding is that the amount initially contributed as After-Tax can be withdrawn tax-free, but the gains before being converted to Roth are subject to a 5 year rule.
No money in Roth IRA to start.
Do a backdoor Roth on May 1, 2015, contributing $5500 to Traditional IRA and converting it.
Contribute $10K to after-tax 401k on July 1, 2015.
Convert $11K from After-tax to Roth 401k on August 1, 2015.
Withdraw $5500 from Roth IRA before January 1, 2020: No taxes, no penalty.
Withdraw money from Roth 401k: Withdrawals are pro-rata between contribution (no taxes, no penalty), gains before being converted (no taxes, penalty if withdrawn before January 1, 2020), and gains (taxes, penalty if not qualified).
Convert $11K from After-tax to Roth IRA on August 1, 2015.
Withdraw $5500 from Roth IRA before January 1, 2020: $1000 subject to 10% penalty. Remainder: No taxes, no penalty. Can withdraw a total of $16500 without taxes, though first $1000 subject to penalty.
Personally, I've been keeping track of all my Roth contributions and conversions, since when my Roth 401k conversions are rolled into my Roth IRA they'll be combined with any backdoor conversions I did the same year. I understand that my withdrawals will be in the order of 1) Contributions, 2) Conversions within each year starting with the oldest conversion year, with (a) taxable conversions first (subject to 10% penalty if not 5 years old), followed by (b) nontaxable conversions. Then 3) Earnings are withdrawn, subject to tax and penalty if not qualified.
I looked a little closer at Pub 590. The rollover from the 401k is subject to the 5-year rule, but only portions that are taxable at the time of the conversion are subject to the 10% penalty. So, i guess effectively, the 5 year rule does not matter if you are only rolling over after-tax contributions (and not their earnings). I stand corrected.
Fortunately, my misunderstanding has not hurt me in any way since i plan to let my Roth continue to grow for some time.
Here is the language from Pub 590:
Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount).
Maybe this helps:
2014 - Roth IRA opened, no contributions
2015 - 11,000 non-taxable conversion, 603.29 taxable conversion (earnings before backdoor) [starts 5 year clock]
2016 - 21,852.70 non-taxable conversion, 71.08 taxable conversion (earnings before backdoor)
2017 - 24,144,.49 non-taxable conversion, 1,128.62 taxable conversion (earnings before backdoor)
2018 - 26,454.48 non-taxable conversion, 0.00 taxable conversion (earnings before backdoor)
I read the IRS rules and this is what I think are the ordering rules (age 52, <5 years)
1. Withdraw 603.29 tax free and pay 10% penalty on 603.29
2. Withdraw 11,000 tax and penalty free
3. Withdraw 71.08 tax free and pay 10% penalty on 71.08
4. Withdraw 21,852.70 tax and penalty free
5. Withdraw 1,128.62 tax free and pay 10% penalty on 1,128.62
6. Withdraw 24,144.49 tax and penalty free
7. Withdraw 26,454.48 tax and penalty free
8. Withdraw any earnings and pay tax and 10% penalty
You must withdraw in this order. You cannot withdraw #2 first. So it is important when doing backdoor Roth's to keep track of all activity and try to minimize earnings before conversion.
So, at age 52 and all conversions <5 years, I could pull out all my money less earnings and would have to pay 10% penalty on all of the taxable conversions (1,802.99). I can live with that.