5 Year Holding Period for Roth IRA Conversion
I have a client age 64 with assets in a Roth 401(k). He is interested in rolling all proceeds from the Roth 401(k) to a newly established Roth IRA. I understand the 5-year rule to be as follows. If client age is below 59.5 and the client rolls assets from the Roth 401(k) to a new Roth IRA, the 5 year clock resets (based on the first contribution for the new account). If client age is below 59.5 and the client rolls assets from the Roth 401(k) to a Roth IRA that was established years ago, the clock is based on past contributions of that older Roth IRA. If client age over 59.5, the 5 year holding period for conversion assets no longer applies, but still applies to earnings above the conversion amount. Is this the correct application of the 5 year rule?
Permalink Submitted by Alan - IRA critic on Wed, 2020-10-07 21:27
If client rolls Roth 401k assets to a Roth IRA and has not had a prior Roth IRA, basis in the new Roth IRA is what the client contributed to the Roth 401k. However, if the client contributed to the Roth 401k for over 5 years and is over 59.5, then the entire value of the Roth 401k rollover is treated as regular contribution basis in the Roth IRA, which could be withdrawn anytime without tax or penalty. But earnings that are generated in the Roth IRA after the rollover will only be tax free after 5 years of having a Roth IRA. Basically, you are correct that if ANY Roth 401k balance is rolled into a qualified Roth IRA (5 years and 59.5), the rollover money is also instantly qualified and the entire Roth IRA is tax free. Roth IRA conversion holding periods for purposes of the 10% penaltyno longer apply after 59.5 whether the Roth IRA is qualified or not. Until the Roth IRA is fully qualified, the owner has some accounting requirements to track the Roth IRA basis. Once qualified, tracking is no longer needed.