Clarify Roth withdrawals prior to 59.5

[karen1972]

I need some help understand Roth Withdrawal rules and order.

1. I'm 52, so taking them out pre-59.5
2. I have had a Roth IRA open for decades so I'm over the 5 year rule
3. I have both Roth IRA and Roth 401k

No longer worker so plan to roll 401k plan into Roth IRA and this is where I'm not sure what the rules are.

1. I know I can take out anything I contributed to my Roth IRA and I have that tracked
2. I know I can take out anything I converted more than 5 years ago and that is tracked and it has to come out after #1.
3. Gains are locked until 59.5 unless I want to pay tax/penalty

But what about the Roth 401k money that would now be in my Roth IRA?? Is any of that money able to be withdrawn tax and penalty free before 59.5?
I get gains are gains, so those fall into #3, but the 401k contributions?? which bucket do those fall into once rolled over?

 

[gauss]

What I found out that really made this easy for me was that rollovers from Roth 401(k)s (if you have one at your employer AND they allow partial distributions) to Roth IRAs are partly treated as contributions (not conversions) to the Roth IRA and are thus available for immediate withdrawal without penalty.

That being said, it is only your after-tax basis (ie contributions) into your Roth 401(k) that gets this treatment, not the growth.

The 1099-R that is issued when you distribute money from a Roth 401(k) will show the after-tax basis in I believe box 5.

It is calculated pro-rata based on the entire balance (ie if 50% of your Roth 401k balance is contributions and 50% is growth, then the same ratio will apply to whatever you withdrawal / roll over).

I believe that I was able to do 401k In-Plan Roth conversions from my traditional 401k to the Roth 401k and then shortly thereafter roll the money to the Roth IRA.

My recommendation would be if your plan allows partial distributions, then take a small sum (ie maybe $1000) and attempt this. Next year once all the tax reporting has occurred, you can verify that your tax software handles this as I suggested above.

This was a game changer for me once I realized how this worked in my case (thanks ER board!), and I soon lost interest in all the 5-year conversion/rollover clocks in that I would now have enough in "contributions" to easily get me to age 59 1/2 and I would not need to worry about the conversions.

Have you looked at IRS Form 8606 and the associated instructions? They mention this near the end.

-gauss

p.s. None of this works if you roll directly from a traditional 401k to any type of IRA. It needs to go to the Roth 401(k) first.

p.p.s IRS instructions refers to Roth 401ks as Designated Roth accunts and the box 5 amount as "investment in the contract". You can search the 8606 instructions for these terms.

 

[CDRE]

Perhaps the following post and thread may help: https://www.early-retirement.org/fo...a-question-on-taxes-100678-2.html#post2322912

 

[karen1972]

What I found out that really made this easy for me was that rollovers from Roth 401(k)s (if you have one at your employer AND they allow partial distributions) to Roth IRAs are partly treated as contributions (not conversions) to the Roth IRA and are thus available for immediate withdrawal without penalty.

That being said, it is only your after-tax basis (ie contributions) into your Roth 401(k) that gets this treatment, not the growth.

The 1099-R that is issued when you distribute money from a Roth 401(k) will show the after-tax basis in I believe box 5.

This is what I was trying to get confirmation of. I'm not sure I found anything useful in 8606 but 1099-R instructions I think confirmed it

My understand now is if I rolled over $10k and $8k was contributions to my Roth 401k, It would show the $10k in box 1, the $8k in box 5, H in Box 7, and then box 11 the year I started making contributions.

Now I assume Box 11 wont matter because my Roth IRA is existing.

 

[gauss]

I'll go ahead an post replica's of the 2 1099-Rs that I received the last time I did this (there is one for the Traditional 401k to Roth 401k conversion and then a 2nd one for the Roth 401k to Roth IRA rollover).

It might not be until tomorrow however.

-gauss

 

[gauss]

Okay,

Here are replica 1099-Rs for the last time I did a traditional 401k --> Roth 401k --> Roth IRA 2 step transfer to gain immediate access to a portion of the funds without penalty.

The first 1099-R with the BLUE text in the lower left hand side represents the traditional 401k to Roth 401k "In-Plan" conversion.

The second 1099-R with the RED text in the corner represents the Roth 401k to Roth IRA direct rollover.

These forms were recreated based on what I had entered into my 2019 tax software.

In both transactions, I did not directly receive any of the funds. (ie not a 60 day rollover).

It looks like the Roth 401k was opened back in 2014. I am not sure if this was important or not. If you Roth 401k has been opened less than 5 years you would need to investigate that separately.

Also as you can see in the 2nd transaction, the majority of the distribution was included in box 5. That is because the Roth 401k did not have much funds in it before I moved the ~130,000 into it and then I quickly did the IRA rollover so that there was not much time for "growth".

Hope this helps

-gauss

 

[Dtail]

Perhaps the following post and thread may help: https://www.early-retirement.org/fo...a-question-on-taxes-100678-2.html#post2322912

+1
Also a more colorful version from Bogleheads.
https://www.bogleheads.org/wiki/Roth_IRA#cite_note-23

 

[karen1972]

+1
Also a more colorful version from Bogleheads.
https://www.bogleheads.org/wiki/Roth_IRA#cite_note-23

Unfortunately none of these addresses Roth 401k Rollover treatment which is why I had asked the question, its the one topic I've never seen addressed.

 

[Dtail]

Unfortunately none of these addresses Roth 401k Rollover treatment which is why I had asked the question, its the one topic I've never seen addressed.

I see what you are saying. Well in the chart all contributions whether under 59.5 or not 5 years old yet are not taxed or penalized if taken while under 59.5
Thus I would think that any contributions to a Roth 401k would come under this rule and it would not count as a conversion rule to the Roth IRA.

 

[G-Man]

Unfortunately none of these addresses Roth 401k Rollover treatment which is why I had asked the question, its the one topic I've never seen addressed.

This may help.
https://www.investopedia.com/articles/retirement/09/roth-401k-rollover.asp

 

[gauss]

This is what I was trying to get confirmation of. I'm not sure I found anything useful in 8606 but 1099-R instructions I think confirmed it

My understand now is if I rolled over $10k and $8k was contributions to my Roth 401k, It would show the $10k in box 1, the $8k in box 5, H in Box 7, and then box 11 the year I started making contributions.

Now I assume Box 11 wont matter because my Roth IRA is existing.

This does, indeed, seem consistent with the 2nd 1099-R I posted above (ie the Roth 401k --> Roth IRA rollover). You seem to have a good handle on this.

The line 22 instructions for IRS form 8606 gives useful info on this:
(Line 22 is the line where you enter your current "contribution basis" of your Roth IRAs.
This amount is available to be withdrawn anytime penalty free. Any "contribution basis" comes out first before any conversions or growth )

Line 22
...
• Increase the amount on line 22 by any amount rolled in
from a designated Roth, Roth SEP, or Roth SIMPLE
account that is treated as investment in the contract.

-gauss

 

[karen1972]

Adding this video actually addresses my question directly, sharing as I think it makes is way more clear

https://youtu.be/c6ZgIR5Vx00?feature=shared

 

[gauss]

A decent summary indeed. Thanks for sharing it.

-gauss