Can I direct transfer the holdings of my Roth 401(K) to an existing Roth IRA without penalty? The 401K is NOT 5 years old, the IRA IS over 5 years old, I am older than 59 1/2.
Ski
If you are still employed by the plan sponsor, it depends on the terms of your plan. They may or may not allow in-service withdrawals. If you are no longer employed by that plan sponsor, you are able to directly transfer with no penalties.
AJ
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Hi @aj485,
Questions:
- Does the Roth 401K have a 5 year clock?
- If it does have a 5 year clock, would doing the rollover to the Roth IRA, which is beyond its 5 year clock, kill the remaining time left on the 401K clock?
Gene
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Thanks for the reply. I gather from it that a transfer to a Roth IRA is considered a withdrawal rather than a roll over.
Hi @JohnSki,
It is a roll over.
The “money” is being transferred from one retirement account to another.
When we say “withdrawal” in this context, the money would be leaving a retirement account and would not be placed back into a retirement account.
Does that help you?
Gene
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Any time you take money out of a retirement account it’s a withdrawal. It can be a withdrawal that you roll over into another account, but it’s still a withdrawal.
AJ
That’s not correct. Taking money out of a retirement account is a withdrawal. The withdrawal is what triggers a 1099-R, which has codes to help confirm what type of withdrawal it is. A roll over is just a specific type of withdrawal.
AJ
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The same 5 year clocks that apply to IRAs also apply to 401(k)s:
- The Roth 401(k) account must have been open and funded for at least 5 years for withdrawals to be qualifying withdrawals
- When doing pre-tax to Roth conversions within the 401(k), each conversion has it’s own 5 year clock if taking non-qualified withdrawals
If you have multiple 401(k) accounts, please note that the clocks are applied to each 401(k) separately, unlike the IRA clock, which applies to all IRAs owned by an individual. Also note that 401(k) clocks are separate from IRA clocks.
It depends on whether your IRA meets the criteria for qualified withdrawals, and which 5 year clock you are talking about.
If your IRA does meet the criteria for qualified withdrawals, then any money rolled into the IRA from the 401(k) will also be eligible for qualified withdrawals, so the 5 year clocks are extinguished.
If your IRA does not meet the criteria for qualified withdrawals, then each 401(k) conversion will carry it’s own 5 year clock into the IRA when using the ordering rules for distributions from the IRA. However, as mentioned above, the 5 year clock for qualified withdrawals is applicable only to the IRA - a 401(k) roll over cannot change the age of the IRA for that clock. So if your Roth 401(k) account is 4 years old, and your Roth IRA is only 2 years old, rolling the 401(k) money into the IRA will re-age it for qualified distribution purposes to being in an account that is only 2 years old.
Edited to add:
I would also note that ordering rules are applied to non-qualified withdrawals that are not rolled over into another qualifying account and will point out that that the 401(k) ordering rules for non-qualified withdrawals are not the same as the IRA ordering rules for non-qualified withdrawals. Non-qualified withdrawals from Roth 401(k) accounts include both contributions and earnings, on a pro-rata basis. (For IRAs, the ordering rules direct that contributions are removed first, before earnings). Non-qualified withdrawal of earnings from both types of accounts is taxed, and can be penalized if you do not meet an exception for the penalty. The rule of 55 provides an exception to the 10% early withdrawal penalty for withdrawals before 59 1/2, but does not provide an exception to the taxation of earnings. So be prepared to pay taxes on a portion of the withdrawal if you are using the Rule of 55 to withdraw money from a Roth 401(k) account.
AJ
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