Author Topic: Roth 5-Year Seasonsing  (Read 3700 times)

BlueLesPaul

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Roth 5-Year Seasonsing
« on: June 24, 2024, 10:14:07 AM »
I have a Roth question, particularly related to the 5-year seasoning rule. 

My father, who is retiring in October at 67, has about $8k in Roth contributions in a 401k, but does not currently have a Roth IRA. 

Question 1: If he rolls those 401k Roth contributions into a Roth IRA, will he need to wait 5 years to take out those funds?  If so, would it just be the earnings while it was in the 401k/IRA or just the earnings while in the IRA.

Question 2:  He has about $1M in his traditional 401k and is thinking about doing Roth Conversion.  If he decides to do a conversion this year, there would be no application of the other 5-year rule as he is older than 59 1/2, correct? 

Question 3: If the rule mentioned in Question 2 still applies and is subject to the 10% early withdrawal tax, if he did a conversion this year, it would be treated at done on January 1, 2024, so he would need to wait until January 1,2029, correct?




tj

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Re: Roth 5-Year Seasonsing
« Reply #1 on: June 27, 2024, 09:24:46 PM »
Why doesn't he just distribute The Roth balance directly from the Roth 401k into his taxable account ? This is a rather small account, and he's post 59.5, so there's no early withdrawal penalty..

Nothlit

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Re: Roth 5-Year Seasonsing
« Reply #2 on: August 28, 2024, 02:37:30 PM »
The 10% additional tax never applies after age 59.5, so he could withdraw Roth conversions immediately without any additional penalty.

As for the rollover from Roth 401k to Roth IRA, any holding period from the Roth 401k does not transfer to the Roth IRA. If he has never had any Roth IRA until now, then the 5-year clock for tax-free withdrawal of earnings from the Roth IRA would start now. Due to the Roth IRA withdrawal ordering rules, any withdrawals he takes from the Roth IRA would come from his contribution basis first, which is always tax-free. Only once all contributions have been exhausted would he then start to withdraw from conversions (see above), and after that, earnings, which would be taxable until that initial 5-year holding period is achieved. Again, no 10% penalty since he is over age 59.5.

seattlecyclone

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Re: Roth 5-Year Seasonsing
« Reply #3 on: August 30, 2024, 01:16:00 AM »
The 10% additional tax never applies after age 59.5, so he could withdraw Roth conversions immediately without any additional penalty.

This is not true. The 10% additional tax looks at whether your distribution was qualified or not. For most of us who open a Roth IRA at a relatively young age, distributions become qualified at 59½. However another requirement for qualified distributions is that you need to have had a Roth IRA open for at least five years. The OP's dad has not. As such, the rules for his withdrawals over the next five years will be the same as for folks under 59½.

In response to the original questions:
1) If the dad had his Roth 401(k) open for at least five years the distribution from the 401(k) will be qualified. As such, the full amount of the rollover will count as a contribution when it hits the Roth IRA, and can therefore be withdrawn for free at any time. Any growth in the money after it hits the Roth IRA will need to wait until the Roth IRA has been established five years to be a qualified distribution when it comes out, else it will be taxed at (marginal rate for regular income + 10%).
2) Your dad will need to have a Roth IRA open for five years in order to take qualified distributions. Until that happens the rules are the same as for everyone else who isn't old or disabled enough to take qualified distributions. That includes a 10% tax on withdrawal of amounts converted to Roth less than five years ago. Once the Roth IRA has been open for five years he'll be able to withdraw any dollars he wants from there for free, even dollars from Roth conversions less than five years old.
3) The conversion date really isn't that relevant here since the five-year conversion clock will expire no earlier than the five-year clock for qualified distributions. January 2029 would be the relevant date as long as he puts some money in a Roth IRA before the end of 2024.

Nothlit

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Re: Roth 5-Year Seasonsing
« Reply #4 on: October 13, 2024, 08:36:30 PM »
https://www.irs.gov/publications/p590b#en_US_2023_publink100089553

Under "Additional Tax on Early Distributions"...

"Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover."

And also, "Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that aren't qualified distributions."

Later, in the exceptions list...

"You have reached age 59½."

Therefore, even if it is a nonqualified withdrawal due to not having satisfied the 5-year rule for conversions or the 5-year rule since the first contribution, the 10% additional tax does not apply after age 59.5.

See also this helpful summary by a CPA, with a handy flowchart: https://obliviousinvestor.com/roth-ira-withdrawal-rules/
« Last Edit: October 13, 2024, 09:01:27 PM by Nothlit »