Roth IRA and the 5 year rule

[Kendoo]

Back in 2021 I put $100 into a Roth IRA with Scwab. Now retired, I'm about to rollover my 401K and Roth 401K into a Fidelity IRA and Roth IRA. I read somewhere that the clock on the 5 year rule starts with your very first contribution (2021 in my case) regardless of which Roth IRA account you withdrawal funds from. So if this is correct, I can transfer my 401K Roth funds into a brand new Fidelity Roth IRA next week and withdrawal funds (contributions AND earnings) starting in 2026? How would Fidelity even know about my Schwab account? Or maybe the above isn't true and I would need to transfer my 401K Roth funds into my almost 4 year old schwab account in order to access all of it in 2026?

 

[SecondCor521]

The IRS considers you to have one virtual Roth IRA regardless of how many individual Roth IRA accounts you have.

Therefore, from a taxation perspective it doesn't matter whether you move your Roth 401(k) funds into a new Fidelity account or existing Schwab account.

Fidelity doesn't need to know about your Schwab Roth IRA. They are not responsible for filling out your tax return - you are. Any withdrawals you make from your Fidelity or Schwab Roth IRAs will be reported to the IRS and to you on a 1099, and you'll complete your tax return knowing your whole picture.

I'm not familiar with the rules related to Roth 401(k)s because they came along after my time. Normally you'd be able to withdraw Roth contributions any time. I really don't think there is a 5 year rule allowing you to withdraw earnings starting in 2026 (unless you're also over 59.5 at that point) because I haven't heard of it before. But I would suggest researching your question by reading the IRS Pub 590-B chapter on Roth IRA distributions and whether or not the are taxable. I'd start at this link on page 31: https://www.irs.gov/pub/irs-pdf/p590b.pdf.

 

[Kendoo]

The IRS considers you to have one virtual Roth IRA regardless of how many individual Roth IRA accounts you have.

Therefore, from a taxation perspective it doesn't matter whether you move your Roth 401(k) funds into a new Fidelity account or existing Schwab account.

Fidelity doesn't need to know about your Schwab Roth IRA. They are not responsible for filling out your tax return - you are. Any withdrawals you make from your Fidelity or Schwab Roth IRAs will be reported to the IRS and to you on a 1099, and you'll complete your tax return knowing your whole picture.

I'm not familiar with the rules related to Roth 401(k)s because they came along after my time. Normally you'd be able to withdraw Roth contributions any time. I really don't think there is a 5 year rule allowing you to withdraw earnings starting in 2026 (unless you're also over 59.5 at that point) because I haven't heard of it before. But I would suggest researching your question by reading the IRS Pub 590-B chapter on Roth IRA distributions and whether or not the are taxable. I'd start at this link on page 31: https://www.irs.gov/pub/irs-pdf/p590b.pdf.

Thanks for the reply. I'll be 59.5 at the end of this year.

Long story, but I am currently receiving some Roth 401K funds as part of my monthly distribution now before I am 59.5. Last year they sent me 2 1099's, one from pre-tax showing it was all taxable and one for my Roth with only the earnings showing taxable. The question I have is this: If I transfer my Roth funds from 401K to my brand new IRA and then turnaround and attempt to withdrawal all of it in 2026 (contributions and earnings). Will they send me the earnings without knowing I meet the 5 year rule? Maybe the 1099 they send will reflect taxes on the earnings and that will get sorted when I do my taxes for the year?

 

[SecondCor521]

Thanks for the reply. I'll be 59.5 at the end of this year.

Long story, but I am currently receiving some Roth 401K funds as part of my monthly distribution now before I am 59.5. Last year they sent me 2 1099's, one from pre-tax showing it was all taxable and one for my Roth with only the earnings showing taxable. The question I have is this: If I transfer my Roth funds from 401K to my brand new IRA and then turnaround and attempt to withdrawal all of it in 2026 (contributions and earnings). Will they send me the earnings without knowing I meet the 5 year rule? Maybe the 1099 they send will reflect taxes on the earnings and that will get sorted when I do my taxes for the year?

Again, I don't know the specific rules on Roth 401(k)s.

But the way taxes generally work, the custodian will send you a 1099 with the distribution, the taxable amount, whether the taxable amount was not determined, taxes withheld, and a distribution code.

You'll then report that 1099 on your tax return, ideally correctly, knowing your whole tax situation.

The custodian doesn't need to know about the 5 year rule or your other Roths or anything else. They'll be able to complete the 1099 with what they know. That, plus what you know, is what results in your tax return being prepared correctly. At the end of the day, it's the taxpayer who's responsible for their tax return, not the custodian. If, for example, the custodian doesn't know that you met the 5 year rule, but you do, then there will be a way to handle that on your return.

To answer your specific questions in order:

1. They'll send you whatever distribution you request. It's up to you to understand the tax consequences of your requests.

2a. I don't know what you mean by "taxes on the earnings". I think normally Roth distributions don't have any taxes withheld. That being said, the custodian may withhold federal and/or state income taxes if you ask them to. But the actual taxability of the distribution will be determined by your tax return, not by what they do.

2b. Yes, it should get sorted on your tax return.

 

[cathy63]

Thanks for the reply. I'll be 59.5 at the end of this year.

Long story, but I am currently receiving some Roth 401K funds as part of my monthly distribution now before I am 59.5. Last year they sent me 2 1099's, one from pre-tax showing it was all taxable and one for my Roth with only the earnings showing taxable. The question I have is this: If I transfer my Roth funds from 401K to my brand new IRA and then turnaround and attempt to withdrawal all of it in 2026 (contributions and earnings). Will they send me the earnings without knowing I meet the 5 year rule? Maybe the 1099 they send will reflect taxes on the earnings and that will get sorted when I do my taxes for the year?

One thing to know about rollovers from Roth 401(k) to Roth IRA accounts is that the rollover inherits the age of the account it's rolled into. So if you have had any Roth IRA for at least 5 years and you are over age 59.5, then all your distributions from all your Roth IRAs are qualified and thus tax free, even if some of the funds you withdraw were rolled over a month ago.

 

[orbops]

So if you have had any Roth IRA for at least 5 years and you are over age 59.5, then all your distributions from all your Roth IRAs are qualified and thus tax free, even if some of the funds you withdraw were rolled over a month ago.

Cathy63 said it perfectly. The first Roth IRA rule is the 5 year rule, and the 59.5 age is the demarcation point where all distributions are qualified.

Congratulations on turning 59.5 this year! My 59.5 is coming up in a year and a half - a date I have been waiting for since I retired at 50.