Author Topic: Roth 401k rollover question  (Read 343 times)

dogboyslim

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Roth 401k rollover question
« on: August 25, 2017, 12:23:35 PM »
A friend (age mid-40s) of mine just changed jobs and wants to get out of the old 401k due to high fees.  His balance is around 200k.  70ish k of that is in roth 401k after tax contributions.  The earnings balance is unknown to him, and the rest of the contributions are regular 401k contributions.  His first contribution was in 2013.

If all he wanted to do was rollover to a combo of traditional and roth 401k, answers would be easy.  However, he wants to take the 70k of principal contributions out to help with his moving expenses (not first-time homeowner), roll all of the pretax 401k stuff to his traditional IRA and roll the earnings on the Roth 401k contributions into his roth IRA.

I wasn't sure this was okay, and the rules seem questionable to me.  I think I'm nervous because he's younger than 59.5 and his first contribution year is 4 calendar years ago.  I mentioned that I thought there was a 5 year rule and he can wait till next year to do the rollover if it lets him do what he wants.

So here are my question  can he withdraw the after tax contributions from a roth 401k without rolling them into a new roth IRA in this circumstance?  I feel like there's a good chance he'd have to pay the penalty on the withdrawl, or if they calculate the balance pro-rata with earnings, would be taxed on the earnings proportion and get a penalty on the whole thing.

He doesn't really want to pay a tax lawyer for this info so he asked me.  I'm no tax expert, but this sounds fishy.  Can anyone confirm which of us is correct (or provide correct information?)  Thanks!

dandarc

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Re: Roth 401k rollover question
« Reply #1 on: August 25, 2017, 01:40:48 PM »
Pretty sure that if he does the following 2 steps with the Roth account, this will work out:

1) Roll the Roth 401K to a Roth IRA in its entirety
2) Withdraw the 70K of contributions from the Roth IRA

Reason being:
1) Your contribution amount should follow from Roth 401K to Roth IRA and count as regular contributions, assuming there are good records - sounds like we're hoping the company can provide said records, but really the custodian should have them.
2) Regular contributions to a Roth IRA can be withdrawn at any time, tax and penalty free.

As I understand it, if you withdraw from the Roth 401K directly, it will always be prorated between contributions and earnings, which is a potential tax and penalty problem here.  Perhaps one of our real accountants will chime in with better advice, but that's how I understand it all works.
« Last Edit: August 25, 2017, 01:43:23 PM by dandarc »

dandarc

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Re: Roth 401k rollover question
« Reply #2 on: August 25, 2017, 01:56:00 PM »
https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts

If you go down, there is an example that goes like this:

Quote
Bob receives a $14,000 eligible rollover distribution that is not a qualified distribution from Bobís designated Roth account, consisting of $11,000 of basis and $3,000 of income. Within 60 days of receipt, Bob rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is deemed to consist of $3,000 of income and $4,000 of basis. Because the only portion of the distribution that could be includible in gross income (the income) is rolled over, none of the distribution is includible in Bobís gross income.

Looks like when you do a rollover that way, the earnings go into the Roth IRA first, then any basis.  So your coworker could do it this way - get a check for ~200K, then send ~130K to wherever the Roth IRA is.  Assuming there is at least $70K of basis, there would be no tax or additional tax.

Spork

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Re: Roth 401k rollover question
« Reply #3 on: August 25, 2017, 05:11:26 PM »

Looks like when you do a rollover that way, the earnings go into the Roth IRA first, then any basis.  So your coworker could do it this way - get a check for ~200K, then send ~130K to wherever the Roth IRA is.  Assuming there is at least $70K of basis, there would be no tax or additional tax.

When I did a mixed Trad/Roth 401k rollover, it was seamless and wasn't a check that had to be split.  I just got Employer Fund Management Company on the phone with Vanguard and they worked it out.  Employer company sent two checks directly to Vanguard, each pre-tagged with an account number.  I just sat at home and ate popcorn.
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