QUALIFIED ROTH 401(k) DISTRIBUTION / DOL & IRS RETIREMENT PLAN GUIDANCE | Ed Slott and Company, LLC

QUALIFIED ROTH 401(k) DISTRIBUTION / DOL & IRS RETIREMENT PLAN GUIDANCE

HELLO. MY FIRST EVER TWEET HERE. I WILL BE (69) YEARS OLD -- NEXT SUNDAY, AUGUST 16TH. I STARTED MY FIRST EVER ROTH 401(k) -- AT THE BEGINNING OF THIS YEAR -- FOR FUTURE TAX RELATED PURPOSES. I SHOULD HAVE DONE THIS -- AWHILE AGO, BUT BETTER LATE THAN NEVER. I SEE WHERE THE "DOL" GUIDANCE SAYS, AS FAR AS A QUALIFIED DISTRIBUTION IS CONCERNED, YOU NEED TO HAVE HELD THE ROTH 401(k) FOR AT LEAST (5) YEARS TO QUALIFY FOR A "QUALIFIED DISTRIBUTION." SO, I WILL BE LEAVING THE WORK FORCE WHEN I TURN (7O) -- IN ANOTHER YEAR OR SO, SO I WOULD NOT HAVE FULFILLED THAT (5) YEARS HOLDING PERIOD REQUIREMENT. SO, DO I HAVE TO LEAVE THE ROTH 401(k) WITH THE COMPANY FOR (4) MORE YEARS PRIOR TO PULLING IT OUT -- OR -- DO I JUST CONDUCT A ROTH 401(k) CONVERSION, AND START THE CLOCKING TICKING THEN? I THINK EITHER WILL WORK. I'M JUST LOOKING FOR SOME OUTSIDE FEEDBACK HERE. THANKS!

  • You should do a direct rollover of the Roth 401k to a Roth IRA prior to the calendar year in which you will reach 72 to avoid RMDs from the Roth 401k account. While the Roth 401k will be non qualified (not held 5 years), taxation will depend on whether you have a Roth IRA that is qualified. If your Roth IRA is qualified, the Roth 401k money also becomes qualified once it is rolled into the Roth IRA.  If your Roth IRA is also not qualified, then you will have some accounting to do. The amount you contributed to your Roth 401k will be treated as if it was a regular Roth IRA contribution, and can be distributed anytime without tax or penalty. The Roth IRA will become qualified after you have held a Roth IRA for at least 5 years, and after that time the entire account will be qualified and tax free.  You cannot count the time your money was in the Roth 401k toward the 5 year period for your Roth IRA.  If you do not have a Roth IRA now, and your income is not too high to make a contribution, you could make a small 2020 contribution now just to start the 5 year clock for your Roth IRA.  
  • While it is preferable to do a rollover to your Roth IRA, if you instead had your Roth 401k balance distributed, you would owe income tax on any gains generated in your Roth 401k, which is probably a very small amount compared to your contributions. 
 

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