5 year rule over Age 70.5
If we set up the Roth 401k for my 88 year old dad, does the 5 year rule mean that his first 5 year distributions are subject to penalty, or is the 5 year rule modified for a new account post age 70.5?
If we set up the Roth 401k for my 88 year old dad, does the 5 year rule mean that his first 5 year distributions are subject to penalty, or is the 5 year rule modified for a new account post age 70.5?
Permalink Submitted by Alan Spross on Wed, 2008-04-30 00:26
The 5 year holding period remains for a Roth 401k and a separate 5 year holding period applies for a Roth IRA. A partial solution to the Roth 401k RMD problem lies in a plan that will allow rollovers each year due to the age of the owner to a Roth IRA. RMDs will be avoided in future years from the Roth 401k to the extent that these rollovers can be done since there are no RMDs from the Roth IRA.
However, any employer matching contributions do NOT go into the Roth 401k account, but into the pre tax account, so transfers of vested employer contributions from the pre tax account would also have to be made to an IRA, either a TIRA or a Roth IRA through conversion.
The requirements to maximize this are complex, but you must recognize that all Roth contributions come at the expense of the high earners marginal tax rate, so there is an income tax cost to offset any reductions in his taxable estate as a result of the tax payments.
Permalink Submitted by Linda Lawson on Wed, 2008-04-30 15:02
Got it! Taxpayer currently has almost no tax deductions and is paying about the maximum amount of tax on earned income, so its not as if this scenario would be anything new. Earned income expected to continue until death. Currently in good health, so I’m inclined to pursue despite complexity, both he and I are lawyers, tho he is obiviously financially planning-impaired. Thanks, Linda