Transfer Question

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macheta
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Transfer Question

Post by macheta » Sat Sep 08, 2018 5:46 pm

Hi - Is it possible to do a yearly transfer from my after tax 401k to my roth IRA? I feel pretty comfortable with my savings right now for retirement. I would like to switch over to savings to retire early. They indicated I could not just pull out the roth 401k contributions according to my company 401k department. I would need to pull out contributions and earnings and be subject to a 10% penalty. They also indicated I could not roll over the roth 401k. I could roll the company match, and after tax. I do not expect to be with my company until 55. Maybe use the IRS Rule of 55 at another company. Again, is it possible to do a yearly roll over from after tax 401k to roth IRA? Does the yearly transfer count towards the roth IRA contribution limit? Thanks, Macheta

retiredjg
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Re: Transfer Question

Post by retiredjg » Sat Sep 08, 2018 6:08 pm

You are confusing after-tax contributions to 401k with contributions to Roth 401k. Yes, they are both "after tax" but they are not the same thing.

You can, if your plan allows, contribute to an after tax sub account and if your plan allows, roll that out to Roth IRA. Not all plans even have this as an option. If your plan allows this, it does not affect your Roth IRA contribution.

You cannot contribute to Roth 401k and roll that out to Roth IRA while you are still working there (unless there is an age 59.5 exception which I'm not even sure exists).

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Earl Lemongrab
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Re: Transfer Question

Post by Earl Lemongrab » Sun Sep 09, 2018 3:08 pm

retiredjg wrote:
Sat Sep 08, 2018 6:08 pm
You cannot contribute to Roth 401k and roll that out to Roth IRA while you are still working there (unless there is an age 59.5 exception which I'm not even sure exists).
Yes, age 59-1/2 can apply to Roth 401(k).
What is a qualified distribution from a designated Roth account?
A qualified distribution is generally a distribution that is made after a 5-taxable-year period of participation and is either:
made on or after the date you attain age 59½
made after your death, or
attributable to your being disabled.
https://www.irs.gov/retirement-plans/re ... ccounts#21
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

macheta
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Re: Transfer Question

Post by macheta » Mon Sep 10, 2018 8:46 am

Regarding a Roth Ira, is a rollover considered earnings or contributions? Thanks

retiredjg
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Re: Transfer Question

Post by retiredjg » Mon Sep 10, 2018 8:55 am

macheta wrote:
Mon Sep 10, 2018 8:46 am
Regarding a Roth Ira, is a rollover considered earnings or contributions? Thanks
This question could mean several things. What are you asking?

macheta
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Re: Transfer Question

Post by macheta » Mon Sep 10, 2018 10:27 am

I want to know if I can with drawl it early without penalty.

retiredjg
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Re: Transfer Question

Post by retiredjg » Mon Sep 10, 2018 10:41 am

It depends on how the money got into the Roth IRA. The withdrawal rules are different for different kinds of contributions. What do you have in mind?

RickBoglehead
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Re: Transfer Question

Post by RickBoglehead » Mon Sep 10, 2018 10:42 am

If you rollover funds to an IRA, whether taxable or ROTH, the funds don't change their composition. In other words, if 80% of your funds are contributions and 20% are earnings, that mix stays the same when they are rolled over.

So, a rollover of a ROTH 401K to a ROTH IRA of $8,000 in contributions and $2,000 in earnings results in the same end result in the ROTH IRA.

macheta
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Re: Transfer Question

Post by macheta » Mon Sep 10, 2018 10:47 am

RickBoglehead wrote:
Mon Sep 10, 2018 10:42 am
If you rollover funds to an IRA, whether taxable or ROTH, the funds don't change their composition. In other words, if 80% of your funds are contributions and 20% are earnings, that mix stays the same when they are rolled over.

So, a rollover of a ROTH 401K to a ROTH IRA of $8,000 in contributions and $2,000 in earnings results in the same end result in the ROTH IRA.

It would transfer over from after tax 401k

retiredjg
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Re: Transfer Question

Post by retiredjg » Mon Sep 10, 2018 11:18 am

Is there any money in Roth IRA now? If yes, how did it get there?

macheta
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Re: Transfer Question

Post by macheta » Mon Sep 10, 2018 11:26 am

Yes there is money in there now. I did the transfer from an after tax 401k.

retiredjg
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Re: Transfer Question

Post by retiredjg » Mon Sep 10, 2018 11:36 am

macheta wrote:
Mon Sep 10, 2018 11:26 am
Yes there is money in there now. I did the transfer from an after tax 401k.
Just for clarity, I assume you mean the after-tax account, not the Roth 401k account. I also assume this is your only Roth IRA and that is the only money in it.

Let's say you put $10,000 into the after-tax account and it grew to $12,000 before being rolled to Roth IRA. Since being in the Roth IRA, it has grown to $12,300.

The $2,000 will have a 5 tax year clock on it. If you take that money out before the clock runs out, there will be a 10% penalty on what you take out.

The $10,000 does not have a 5 tax year clock and there is no penalty for taking that money out.....but you cannot take it out until you have taken out the $2,000 first.

The $300 in earnings that have occurred inside the Roth IRA is not available (without tax and penalty) until the Roth IRA is 5 years old AND you are 59.5.

international001
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Re: Transfer Question

Post by international001 » Mon Sep 10, 2018 12:32 pm

I was not aware of these rules.
Then you can contribute to an after-tax 401k, do an immediate in-service distribution to a Roth Ira and take out (distribution) this money whenever you want? This seems very flexible

retiredjg
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Re: Transfer Question

Post by retiredjg » Mon Sep 10, 2018 12:41 pm

international001 wrote:
Mon Sep 10, 2018 12:32 pm
I was not aware of these rules.
Then you can contribute to an after-tax 401k, do an immediate in-service distribution to a Roth Ira and take out (distribution) this money whenever you want? This seems very flexible
Only some plans allow people to contribute to an after tax account. Most, but not all of those, allow people to roll that money out to Roth IRA while still workin there.

This maneuver has been named the "mega back door". If you want you can search for some previous threads (using google box above).

macheta
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Re: Transfer Question

Post by macheta » Mon Sep 10, 2018 8:37 pm

retiredjg wrote:
Mon Sep 10, 2018 11:36 am
macheta wrote:
Mon Sep 10, 2018 11:26 am
Yes there is money in there now. I did the transfer from an after tax 401k.
Just for clarity, I assume you mean the after-tax account, not the Roth 401k account. I also assume this is your only Roth IRA and that is the only money in it.

Let's say you put $10,000 into the after-tax account and it grew to $12,000 before being rolled to Roth IRA. Since being in the Roth IRA, it has grown to $12,300.

The $2,000 will have a 5 tax year clock on it. If you take that money out before the clock runs out, there will be a 10% penalty on what you take out.

The $10,000 does not have a 5 tax year clock and there is no penalty for taking that money out.....but you cannot take it out until you have taken out the $2,000 first.

The $300 in earnings that have occurred inside the Roth IRA is not available (without tax and penalty) until the Roth IRA is 5 years old AND you are 59.5.
This is a perfect explanation. Thank you. I'm going to make sure my 1099-R form is in a safe spot for documentation purposes.

macheta
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Re: Transfer Question

Post by macheta » Mon Sep 10, 2018 9:35 pm

retiredjg wrote:
Mon Sep 10, 2018 11:36 am
macheta wrote:
Mon Sep 10, 2018 11:26 am
Yes there is money in there now. I did the transfer from an after tax 401k.
Just for clarity, I assume you mean the after-tax account, not the Roth 401k account. I also assume this is your only Roth IRA and that is the only money in it.

Let's say you put $10,000 into the after-tax account and it grew to $12,000 before being rolled to Roth IRA. Since being in the Roth IRA, it has grown to $12,300.

The $2,000 will have a 5 tax year clock on it. If you take that money out before the clock runs out, there will be a 10% penalty on what you take out.

The $10,000 does not have a 5 tax year clock and there is no penalty for taking that money out.....but you cannot take it out until you have taken out the $2,000 first.

The $300 in earnings that have occurred inside the Roth IRA is not available (without tax and penalty) until the Roth IRA is 5 years old AND you are 59.5.
retiredjg - once again thank you for the details. Do you know where I can find more information about the 5 tax year clock? Is it something published on the IRS website? Thanks!

retiredjg
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Re: Transfer Question

Post by retiredjg » Tue Sep 11, 2018 5:57 am

Fairmark.com has a lot of information that you might find useful - Roth withdrawal order rules and the 5 year clock. Use the search function on that site for the topics you are interested in.

The clock starts on January 1 no matter when you do the rollover - so a rollover with a taxable component done anytime in 2018 will be available on/after January 1 2023 with no penalty.


There is one other approach to all this - the earnings that occur in the after-tax account MUST leave the 401k with the after-tax contributions. But you can have those earnings sent to tIRA instead of Roth IRA. In that case, no tax would be due and there would be no 5 tax year clock.

And yes, I'm sure the IRS has something - my guess would be in Publication 590B.

international001
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Re: Transfer Question

Post by international001 » Wed Sep 12, 2018 6:54 am

retiredjg wrote:
Mon Sep 10, 2018 12:41 pm
international001 wrote:
Mon Sep 10, 2018 12:32 pm
I was not aware of these rules.
Then you can contribute to an after-tax 401k, do an immediate in-service distribution to a Roth Ira and take out (distribution) this money whenever you want? This seems very flexible
Only some plans allow people to contribute to an after tax account. Most, but not all of those, allow people to roll that money out to Roth IRA while still workin there.

This maneuver has been named the "mega back door". If you want you can search for some previous threads (using google box above).
I'm doing megabackdoors. I was interested in the part of taking out the money after int went into the Roth IRA

So you can take the $10k whenever you want. After you take the $2k just paying taxes on it? Or is there any penalty?
Is it the same if you contribute directly to the Roth IRA?

retiredjg
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Re: Transfer Question

Post by retiredjg » Wed Sep 12, 2018 8:18 am

international001 wrote:
Wed Sep 12, 2018 6:54 am
I'm doing megabackdoors. I was interested in the part of taking out the money after int went into the Roth IRA

So you can take the $10k whenever you want. After you take the $2k just paying taxes on it? Or is there any penalty?
Is it the same if you contribute directly to the Roth IRA?
The $2k must come out first (if there are no direct contributions). You have already paid tax on the $2k, so there is no tax but a 10% penalty if the 5 year clock has not finished running.

Then the $10k can can come out - no tax, no penalty.

If there are any direct contributions to Roth IRA (not back door, not conversion), the direct contributions come out before the $2k.

You can see that all the money going into Roth IRA must be documented meticulously and those records kept for many years. You must know how much you have in direct contributions. And for rollovers/conversions you must know how much was taxable and how much was not taxable when the rollover/conversion happened. Everything else is earnings which not not available without tax or penalty until after 59.5 (in addition to the IRA being 5 years old).

international001
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Re: Transfer Question

Post by international001 » Fri Sep 14, 2018 4:16 am

So let's say you do the in-service distribution immediately, no earnings. The $10k goes immediately to the Roth IRA. You can take those $10k from your Roth IRA whenever you want?
Isn't this too good of a deal? It's like having the flexibility of a taxable investment account with all the tax benefits of a retirement account.

If you invest $5k directly on a Roth IRA, you have to wait 5 years to take them out, right?

retiredjg
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Re: Transfer Question

Post by retiredjg » Fri Sep 14, 2018 6:14 am

international001 wrote:
Fri Sep 14, 2018 4:16 am
So let's say you do the in-service distribution immediately, no earnings. The $10k goes immediately to the Roth IRA. You can take those $10k from your Roth IRA whenever you want?
Yes.


If you invest $5k directly on a Roth IRA, you have to wait 5 years to take them out, right?
No. Direct contributions to Roth IRA can be removed anytime without penalty. What cannot be removed without penalty is the earnings that occur inside the Roth IRA. That requires that the Roth IRA be 5 years old and the person be 59.5 years old.

international001
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Re: Transfer Question

Post by international001 » Fri Sep 14, 2018 2:51 pm

Great info... Does the backdoor (tIRA- > rIRA) work like megabackdoors?

Any reason for doing direct Roth Ira contributions, then? They seem less flexible

retiredjg
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Re: Transfer Question

Post by retiredjg » Fri Sep 14, 2018 4:27 pm

The back door does work in a somewhat similar manner, but I think you misunderstood. Direct contributions to Roth are the most flexible, not less flexible.

international001
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Re: Transfer Question

Post by international001 » Thu Sep 20, 2018 2:39 am

Ok.. reading about it.. It looks a Roth contribution can be taken out anytime. And Roth contribution after a conversion only after 5 years (roth conversion ladder).

Still, it seems a no brainer to contribute to a Roth if you have some $ to spare.

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