Roth 401k benefits

[Dash man]

Whenever I get conflicting answers, I try to go to the source. While it is not excerpts from the actual law, the following is from the IRS. I believe it says that at age 59.5+ we are free and clear of any penalty from conversions done within the last 5 years. Bold and underlined parts are my accents and some parts are clipped out. You can read the whole publications here:

https://www.irs.gov/publications/p590b#en_US_2019_publink1000231064



I read that as any withdrawal from a Roth IRA are "qualified" once the recipient is over 59.5 and their 1st Roth IRA opened and contributed to was over 5 tax years ago. Meeting that requirement, any withdrawal is not taxed. Further, even if the withdrawal was not "qualified" since the recipient is over 59.5 the "additional 10% tax" does not apply either.

Here’s the IRS code:

https://www.law.cornell.edu/uscode/text/26/408A

I can see why there are different interpretations.

 

[sergio]

I'll throw this out there as well just to make sure I understand. The benefits of a Roth IRA are:

1. You can withdraw principal at any time for any reason.

2. You can withdraw the earnings after age 59.5 provided the Roth has been open for 5 years.

3. In some cases you can withdraw earnings before 59.5 (e.g. buying your first home).



Does #1 above hold true for Roth 401k s as well? This would be a game-changer for early retirement. Because I see Roth 401ks so heavily discouraged, my guess is no.

Also, are Roth 401ks typically rolled over to Roth IRAs. which means that principal can be withdrawn at anytime, provided the 5 year rule is met?

 

[ut2sua]

Exceptions.

You may not have to pay the 10% additional tax in the following situations.
• You have reached age 59½.
• You are totally and permanently disabled.
• You are the beneficiary of a deceased IRA owner.
• You use the distribution to buy, build, or rebuild a first home.
• The distributions are part of a series of substantially equal payments.
• You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income (defined earlier) for the year.
• You are paying medical insurance premiums during a period of unemployment.

The bolded part is interesting. Could FIRE folks automatically qualify for this exception (for not currently working)?

 

[Dash man]

Okay, so after consulting my tax expert (DW) who searched through the Federal regulations regarding this, I stand corrected. The only five-year rule that applies to those over 59 1/2 is the first deposit into the first Roth IRA by that individual. The conversion five-year rule only applies to those under 59 1/2 unless the original Roth is less than five years old.

 

[Sunset]

Thank you. Looks like I'll have to plan a time-frame to stop my conversions five years before I want to take withdrawals to be on the safe side. I started "conversions" last year, so those onward will be traceable. This year should be my biggest conversion, barring any tax surprises. I was really surprised that the conversions were taxable, since you've just paid taxes on them.

It may be that I convert 2021-2025; and start SS and taking withdrawals from my traditional IRA starting 2026; five years earlier than I intended to, to get RDMs down that way . . .

Think of the extra 10% as a penalty instead of a tax and it makes more sense. As it's the same penalty that would be paid by taking the money directly out of an IRA. This stops people from doing conversions to avoid the 10% penalty.