Roth 401K monies rolled into individuals (58 y/o) first Roth IRA | Ed Slott and Company, LLC

Roth 401K monies rolled into individuals (58 y/o) first Roth IRA

Money from the Roth 401K gets rolled into the clients first Roth IRA. Client is 58. If the client would like to withdrawal some money out of the Roth IRA, how is the distribution treated? Does the contributions that the client made while the money was in the Roth 401K transfer over to the Roth IRA? I have heard a few different scenario's. I have tried to find in the IRS Pub. 590.
Any help would be appreciated. If you could also let me know where it is in the IRS Pub, that would be great !!!
Peace !!

  • Upon rollover to the Roth IRA, the client's contribution basis in the Roth 401(k) became contribution basis in the Roth IRA and the earnings in the Roth 401(k) became earnings in the Roth IRA.  The year that the client rolled the funds into this first Roth IRA became the first year of the 5-year qualification period after which distributions of earnings from the Roth IRA will be tax and penalty-free qualified distributions.
  • Had the client instead been age 59½ and had completed the 5-year qualification period for the Roth 401(k) for distributions from the Roth 401(k) to be qualified distributions, the entire amount rolled over would have become contribution basis in the Roth IRA.
  • This transfer of basis is described in CFR § 1.408A-10 Q&A-3(a).

I think that CFR section needs to be updated to reflect IRRs. As it reads now, an IRR in the Roth 401k is obviously basis in the contract, however the CFR indicates it will be treated as REGULAR Roth IRA contribution basis.  It should be treated as Roth conversion basis (line 24 of Form 8606) and follow the Roth IRA ordering rules. Further, Notice 2010-84 states that the 5 year holding period for purposes of the 10% penalty on taxable IRRs follows through to the Roth IRA after a rollover, which is consistent with qualified rollover contributions (pre tax 401k to Roth IRA) and Roth IRA conversions. Accordingly, I think the CFR needs to be updated to reflect this in how Roth IRA distributions of rollovers from a Roth 401k are to be handled.


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