Non-qualified Roth 401K rollover

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
2cents2
Posts: 341
Joined: Sun Mar 02, 2014 11:31 am

Non-qualified Roth 401K rollover

Post by 2cents2 » Fri Dec 07, 2018 10:16 am

We are planning 401k contributions for DH (age 63) for next year. I believe DH will retire in the first or second quarter of next year. DH has a choice of pre-tax, Roth and After-tax contributions. (He receives a 4% match on all 3 funding categories--but no match for catch up contributions). Up to this point DH has not made any Roth 401k contributions.

If it matters, DH has already met the 5 year qualification period for his Roth IRA. My question is if DH makes Roth 401K contributions next year and then rolls over to his Roth IRA before the 401K 5 year qualification period, are the earnings that are attributed to the 401K Roth contributions taxed?

Silk McCue
Posts: 1464
Joined: Thu Feb 25, 2016 7:11 pm

Re: Non-qualified Roth 401K rollover

Post by Silk McCue » Fri Dec 07, 2018 10:28 am

I did a search on Bogleheads and found a thread with responses from Alan S. (the expert here) that answers your question from February 2018.

viewtopic.php?t=241428

Cheers

megabad
Posts: 828
Joined: Fri Jun 01, 2018 4:00 pm

Re: Non-qualified Roth 401K rollover

Post by megabad » Fri Dec 07, 2018 10:47 am

A rollover of a Roth distribution is neither qualified nor non-qualified. Separate code (H) on 1099R. The "5 year rule" does not seem to apply. Roth IRA was held for >5 years so you are good in the future (where the rule might have applied).
Last edited by megabad on Fri Dec 07, 2018 3:05 pm, edited 1 time in total.

Alan S.
Posts: 7860
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: Non-qualified Roth 401K rollover

Post by Alan S. » Fri Dec 07, 2018 1:03 pm

2cents2 wrote:
Fri Dec 07, 2018 10:16 am
We are planning 401k contributions for DH (age 63) for next year. I believe DH will retire in the first or second quarter of next year. DH has a choice of pre-tax, Roth and After-tax contributions. (He receives a 4% match on all 3 funding categories--but no match for catch up contributions). Up to this point DH has not made any Roth 401k contributions.

If it matters, DH has already met the 5 year qualification period for his Roth IRA. My question is if DH makes Roth 401K contributions next year and then rolls over to his Roth IRA before the 401K 5 year qualification period, are the earnings that are attributed to the 401K Roth contributions taxed?

No, the Roth 401k total (including earnings) rolled to a qualified Roth IRA will be immediately tax free if distributed from the Roth IRA as megabad indicated.

However, in this situation, he should just continue his pre tax 401k contributions and plan on converting the amount he wishes to his Roth IRA later in 2019 after he retires and does a direct rollover to his TIRA. He will have be able to convert more since his taxable income will have been lowered by the traditional 401k contributions and will be able to choose exactly how much should be converted as the taxable income for 2019 shapes up. These Roth conversions will also be immediately tax and penalty free if withdrawn from the Roth IRA, again since the Roth IRA is already qualified. This also makes his direct rollover more simple because he will not be dealing with a Roth 401k balance and having the 401k balance going to two different IRA types. There would be no H coded 1099R issued, just the one G coded 1099R.

Further, suppose he does NOT retire before very late in 2019. He could then regret having made the Roth 401k contributions because 2019 might turn into a high income year in which pre tax contributions would have been more desirable.

2cents2
Posts: 341
Joined: Sun Mar 02, 2014 11:31 am

Re: Non-qualified Roth 401K rollover

Post by 2cents2 » Sat Dec 08, 2018 12:57 pm

Silk McCue wrote:
Fri Dec 07, 2018 10:28 am
I did a search on Bogleheads and found a thread with responses from Alan S. (the expert here) that answers your question from February 2018.

viewtopic.php?t=241428

Cheers

Thanks, that is an interesting read,
megabad wrote:
Fri Dec 07, 2018 10:47 am
A rollover of a Roth distribution is neither qualified nor non-qualified. Separate code (H) on 1099R. The "5 year rule" does not seem to apply. Roth IRA was held for >5 years so you are good in the future (where the rule might have applied).
Thank you. It seems that during the direct rollover process some tax magic happens. :D

Alan S. wrote:
Fri Dec 07, 2018 1:03 pm
No, the Roth 401k total (including earnings) rolled to a qualified Roth IRA will be immediately tax free if distributed from the Roth IRA as megabad indicated.

However, in this situation, he should just continue his pre tax 401k contributions and plan on converting the amount he wishes to his Roth IRA later in 2019 after he retires and does a direct rollover to his TIRA. He will have be able to convert more since his taxable income will have been lowered by the traditional 401k contributions and will be able to choose exactly how much should be converted as the taxable income for 2019 shapes up. These Roth conversions will also be immediately tax and penalty free if withdrawn from the Roth IRA, again since the Roth IRA is already qualified. This also makes his direct rollover more simple because he will not be dealing with a Roth 401k balance and having the 401k balance going to two different IRA types. There would be no H coded 1099R issued, just the one G coded 1099R.

Further, suppose he does NOT retire before very late in 2019. He could then regret having made the Roth 401k contributions because 2019 might turn into a high income year in which pre tax contributions would have been more desirable.
Thanks Alan. I suppose I am being optimistic that there could be more than negligible earnings in such a short period of time. We will most likely go with the pretax option, but it is good to know how this works.

Post Reply