Individual with Traditional 401(k) and Roth 401(k) assets | Ed Slott and Company, LLC

Individual with Traditional 401(k) and Roth 401(k) assets


Question that I could use some clarification on. Individual who is under 50 has separated service from former employer.
Retirement plan assets include both Traditional 401(k) and Roth 401(k).

The rollover option exists and the big question is if the Roth 401(k) is rolled over into Roth IRA are there any tax consequences?
Some information in tax notice says "after tax contributions included payment from designated Roth account are not taxed, but earning might be taxed."

Can you please clarify tax consequences on Roth 401(k) rollover into Roth IRA. And also, I assume there would be 2 separated Rollovers involved as well, Traditional 401(k) into Traditional IRA and Roth 401(k) into Roth IRA...and I assume that's not an issue.

Thank you for your help in advance.

There would be no current tax due. The tax notice is referring to a distribution from the Roth 401k, not a direct rollover (or even an indirect rollover) to a Roth IRA. You are correct, these would be two direct rollovers with a separate 1099R for each. Once the Roth 401k funds are in the Roth IRA, the individual needs to update his accounting to track his Roth IRA basis. For example, the amount that was contributed to the Roth 401k is treated as regular Roth IRA contributions, and any gains are treated as Roth IRA gains. The 1099R reporting the Roth 401k direct rollover will show the amount that was contributed in Box 5. The person should also check the IRA balance right after these rollovers to make sure that the Roth money actually went into the Roth IRA and the pre tax 401k money into the TIRA account. Sometimes these get messed up and they are a nightmare to get corrected, especially if the error is discovered later on.

Thank you Alan, always appreciate your help.  Have a great day.


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