401k Roth to Roth IRA 5 year rule confusion
I retired in 2019 (age 61) at which time I converted my 401K Roth to a Roth IRA. The 401K Roth had been in existence for 5+ years. The Roth IRA is new in 2019 – my only Roth IRA. Now in 2020, I’m looking at withdrawing the Roth IRA to purchase a second home. I was quite displeased when I realized the 5 year rule reset when I converted from the 401K Roth to the Roth IRA. If this is working the way I fear, I essentially have to wait 10 years to pull my Roth earnings out tax free – this is a terrible surprise for me if true. So I know I can pull the non-earnings (my contributions) portion out tax free. My huge question is what is now considered the non-earnings portion? Is it possible that 100% of the monies converted from the 401K Roth to the Roth IRA are considered non-earnings monies and thus available to be withdrawn tax free? I’m hoping the only monies I can’t withdrawal tax free from the Roth IRA prior to the 5 year period are earnings generated after the Roth IRA was opened in 2019? I can live with that. If I really have to wait 10 years to pull any Roth earnings out tax free – ugh. Thanks for your time and any response. Dave
Permalink Submitted by Alan - IRA critic on Sat, 2020-05-30 02:58
Permalink Submitted by Dave Hilbe on Sat, 2020-05-30 11:57
Thank you so much for your quick response. thankfully those 401K Roth earnings are available to withdraw tax free now. Regarding the comment about taking a mortgage vs. withdrawing the Roth….That evaluation is part of our decision process. Again, thank you for you informative response.
Permalink Submitted by Dave Hilbe on Fri, 2020-09-18 09:18
A follow-up question. When I converted my 401K Roth to a Roth IRA….we also added in the after-tax 401K contributions. So my resulting Roth IRA had a larger balance than my 401K Roth. I don’t know this 100%, but I believe we only used the contribution portion of my after-tax 401K contributions – with the earnings portion of my after-tax 401K contributions going into a regular IRA (along with the rest of my 401K). My question – is that combined contribution of 401K Roth and after-tax 401K contributions still considered a regular Roth IRA contributions (when I opened the Roth IRA) and thus not subject to taxes/penalty before the Roth IRA 5-year period? Hope my question makes sense. Thank you.
Permalink Submitted by David Mertz on Fri, 2020-09-18 13:50
Only earnings within the Roth IRA, which come out last after all of the money you moved to the Roth IRA (even if some of the money you moved had been pre-tax money from the traditional 401(k) account), would be subject to income tax if distributed prior to 2024. Since you are over age 59½ there is no early-distribution penalty on any amounts distributed.