Author Topic: Roth 401k and conversion ladder implications  (Read 10840 times)

Trede

  • Stubble
  • **
  • Posts: 113
  • Age: 50
  • Location: IL
Roth 401k and conversion ladder implications
« on: June 11, 2015, 08:00:22 PM »
So, I'm starting to get serious about figuring out my plan for cash flow with early retirement.  Investment choice aside, part of my work retirement plan is in a Roth 401k.  Research online says that I can roll the Roth 401k directly into a Roth IRA.  Assuming that's right, am I guessing correctly that the ladder timer starts with opening the new Roth IRA (and not when that money went into the Roth 401k)?  Implication being I don't have to ladder at all, just five years later that whole pot of former Roth 401k money is instantly accessible.

Perhaps another stupid question, but I've never rolled a 401k over before.  Since part is invested as Roth 401k and part as tax-deferred regular 401k, I can roll these into two separate analogous IRA accounts, right?

Trede

  • Stubble
  • **
  • Posts: 113
  • Age: 50
  • Location: IL
Re: Roth 401k and conversion ladder implications
« Reply #1 on: June 12, 2015, 07:39:27 AM »
Think I found my own answers and it's better than I thought.  From here: https://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2012/Tax/Accounts_Early_Retirement.jsp

Quote
However, the planning opportunity is that upon separation of service, the Roth 401(k) can be rolled over into a Roth IRA. Once that is done, the Roth IRA distributions will follow the Roth IRA tier rules, meaning that the contributions to the Roth 401(k) — now considered as contributions of the Roth IRA — come out first.

Example: Andrea has contributed $100,000 to her Roth 401(k). It is now worth $125,000 and Andrea has separated from service at age 50. She wishes to take a $20,000 distribution. If she withdraws $20,000 from a Roth 401(k), 20 percent of that amount, or $4,000 will be subject to income tax and the additional 10 percent penalty tax. Instead, Andrea should roll her Roth 401(k) into a Roth IRA. Her $20,000 distribution would then be deemed to come from the $100,000 she contributed and will be tax and penalty free.

And from here: http://fairmark.com/retirement/roth-accounts/designated-roth-accounts/five-year-requirement-for-designated-roth-accounts/

Quote
The age of your designated Roth account doesn’t transfer to a Roth IRA when you do a rollover. This peculiar rule can work to your advantage or disadvantage.

Suppose you’ve had a Roth 401k for just a few years, but you’ve had a Roth IRA more than five years. In this case, you can satisfy the five-year test for all your money by rolling the Roth 401k to a Roth IRA.
The reverse situation is more awkward. You might have held your Roth 401k account several years without holding a Roth IRA. When you create a Roth IRA to receive the rollover from the Roth 401k, you’ll start a new five-year waiting period before you can take qualified distributions.

tl;dr - I think what this means for my situation, where I've held both a Roth 401k and Roth IRA for more than five years each already, is that when I FIRE and rollover the Roth 401k to the Roth IRA I'll have already met the five year rule and contributions can be withdrawn tax free.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #2 on: June 12, 2015, 07:45:06 AM »
Yep you got it.  Roll it over and the contributions to the Roth 401K are treated like Roth IRA contributions - withdraw tax & penalty free at any time.  The first five year rule started whenever you first deposited into any Roth IRA. 

Second 5 year rule applies to each conversion, so if you've got enough contributions to 'prime' the Roth ladder, but not enough to get you all the way to 59.5, you've still got to mind this for the ladder-portion of your withdrawals.

teen persuasion

  • Handlebar Stache
  • *****
  • Posts: 1057
Re: Roth 401k and conversion ladder implications
« Reply #3 on: June 12, 2015, 08:08:26 AM »
So you can withdraw anything up to the value of your contributions tax and penalty free, but you would need to wait until age 59 1/2 to withdraw gains. Immediately after rollover there should be no gains, but over time they should (hopefully) accrue.  Correct?

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Roth 401k and conversion ladder implications
« Reply #4 on: June 12, 2015, 08:25:31 AM »
The entire Roth 401k rollover is treated as one big contribution to the Roth IRA. The entire rollover is available for withdrawal tax and penalty free.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4838
  • Age: 34
  • Location: Seattle, WA
Re: Roth 401k and conversion ladder implications
« Reply #5 on: June 12, 2015, 08:27:06 AM »
So you can withdraw anything up to the value of your contributions tax and penalty free, but you would need to wait until age 59 1/2 to withdraw gains. Immediately after rollover there should be no gains, but over time they should (hopefully) accrue.  Correct?

If you convert from a traditional 401(k), you're right that there would be no gains. If you roll over from a Roth 401(k), the gains you accrued within the 401(k) would be treated as gains in the Roth IRA, just like the contributions to the Roth 401(k) would be treated as contributions to a Roth IRA.

Just so we're clear on this, there is no five-year rule that applies to the ability to withdraw your Roth contributions penalty-free. You can do this the day after you open the account if you want. To withdraw the gains tax-free and penalty-free, you need to be 59˝ (or disabled, dead, or buying your first home), and you need to have the account open for five years. That's where the first five-year rule comes into play. The second five-year rule is for Roth conversions. Neither of these rules applies to direct contributions into the account (or amounts rolled over from Roth 401(k) accounts that are treated as direct contributions).

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Roth 401k and conversion ladder implications
« Reply #6 on: June 12, 2015, 08:30:36 AM »
So you can withdraw anything up to the value of your contributions tax and penalty free, but you would need to wait until age 59 1/2 to withdraw gains. Immediately after rollover there should be no gains, but over time they should (hopefully) accrue.  Correct?

If you convert from a traditional 401(k), you're right that there would be no gains. If you roll over from a Roth 401(k), the gains you accrued within the 401(k) would be treated as gains in the Roth IRA, just like the contributions to the Roth 401(k) would be treated as contributions to a Roth IRA.

Just so we're clear on this, there is no five-year rule that applies to the ability to withdraw your Roth contributions penalty-free. You can do this the day after you open the account if you want. To withdraw the gains tax-free and penalty-free, you need to be 59˝ (or disabled, dead, or buying your first home), and you need to have the account open for five years. That's where the first five-year rule comes into play. The second five-year rule is for Roth conversions. Neither of these rules applies to direct contributions into the account (or amounts rolled over from Roth 401(k) accounts that are treated as direct contributions).

Actually the gains accrued in the Roth 401k are treated as contributions in the Roth IRA when you do a Roth 401k rollover to Roth IRA.

MDM

  • Walrus Stache
  • *******
  • Posts: 9494
Re: Roth 401k and conversion ladder implications
« Reply #7 on: June 12, 2015, 08:44:15 AM »
If you roll over from a Roth 401(k), the gains you accrued within the 401(k) would be treated as gains in the Roth IRA, just like the contributions to the Roth 401(k) would be treated as contributions to a Roth IRA.
Actually the gains accrued in the Roth 401k are treated as contributions in the Roth IRA when you do a Roth 401k rollover to Roth IRA.

Sources? 

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Roth 401k and conversion ladder implications
« Reply #8 on: June 12, 2015, 08:50:09 AM »
From a previous thread.

You can withdrawal those Roth IRA contributions immediately or at any point after contributing them.  The 5 year waiting period only applies to rollover contributions, not direct contributions.

I don't believe this is true either.  Conversions have a 5 year rule, but rollovers do not.  A rollover from a regular pre tax 401k to a Roth IRA would obviously be a conversion as well as a rollover, but a rollover from a Roth 401k into a Roth IRA doesn't have this problem.  If you roll the roth portion of a roth 401k into a Roth IRA you can take out the 'contributions' tax free.  Now for earnings you are bound by the 5 year and age 59 1/2 rule.

You are correct.

The breakdown seems to go like this according to Form 8606. - http://www.irs.gov/pub/irs-pdf/f8606.pdf

Line 19 - How much did you take out of your Roth IRA? Ex: 6k
Line 22 - How much did you contribute over time (1998-present)? Ex:24k (This is also adjusted as you keep pulling from your Roth IRA via these instructions)
Line 23 - Subtract Line 22 from 21 (the first time home owner buying thing is factored to get line 21 from 19), if less than 0 put 0 for the rest. Voila no taxes.

So this shows that the first priority is contributions as was previously discussed and that they are not subject to taxes.

But let's say that you have a Roth 401k rollover and have never made a contribution. (New example)
Line 19 - 6k
Line 22 - 0
Line 23 - 6k
Line 24 - How much have you rolled over? 30k
Line 25 - Subtract 24 from 23, if less than or = to 0 then put 0. 0 Voila again no taxes.

This is only an example for contributions and rollovers. This is not an example of conversion at all.

Further instructions for form 8606 - http://www.irs.gov/pub/irs-pdf/i8606.pdf

Note that line 24 does not require you to differentiate between Roth 401k contributions and gains, it just asks for total rollover.
« Last Edit: June 12, 2015, 08:52:00 AM by matchewed »

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #9 on: June 12, 2015, 09:01:26 AM »
As usual from IRS, clear as mud.  Under the instructions for line 22 on same form:

Quote
Increase the amount on line 22 by any amount rolled in from a designated Roth account that is treated as investment in the contract.

Pretty sure "investment in the contract" = basis.  The more I read, the more I am convinced that as far as the IRS is concerned, a designated Roth account is NOT the same thing as a "qualified plan". 

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #10 on: June 12, 2015, 09:07:40 AM »
The point being that for a Roth 401K -> Roth IRA rollover, you enter the basis rolled in on line 22.

Line 24 would be for a Traditional 401K (or other qualified plan) -> Roth IRA rollover.  Mega Backdoor Roth, for example.

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Roth 401k and conversion ladder implications
« Reply #11 on: June 12, 2015, 09:14:32 AM »
As usual from IRS, clear as mud.  Under the instructions for line 22 on same form:

Quote
Increase the amount on line 22 by any amount rolled in from a designated Roth account that is treated as investment in the contract.

Pretty sure "investment in the contract" = basis.  The more I read, the more I am convinced that as far as the IRS is concerned, a designated Roth account is NOT the same thing as a "qualified plan".

Designated Roth Accounts are defined according to Cornell as
Quote
A designated Roth account is a separate account under a qualified cash or deferred arrangement under a section 401(a) plan, or under a section 403(b) plan, to which designated Roth contributions are permitted to be made in lieu of elective contributions and that satisfies the requirements of § 1.401(k)-1(f) (in the case of a section 401(a) plan) or § 1.403(b)-3(c) (in the case of a section 403(b) plan).
(source: https://www.law.cornell.edu/cfr/text/26/1.402A-1)

This is further checked by looking at the IRS (source: http://www.irs.gov/Retirement-Plans/Governmental-Plans-Under-Internal-Revenue-Code-Section-401-a) where they say these designated Roth accounts are governmental plans only (401(a), 403(b), and 457's [some grandfathered 401k's also]).

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #12 on: June 12, 2015, 09:26:31 AM »
Re-reading the line 24 instructions again.

This actually has nothing to do with Mega-Backdoor Roth - sorry for that misstatement earlier.

What it actually says in regards to rollovers:

Quote
Also include on line 24 any
amounts rolled over from a qualified
retirement plan to a Roth IRA for 2008,
2009, and 2011 to 2014 reported on
your Form 1040, Form 1040A, or Form
1040NR
, and line 21 of your 2010 Form
8606.

Emphasis mine - it is asking for the amount of rollovers that was taxable, and reported on 1040.  This is to remove the amounts of rollovers from traditional accounts on which you have already paid income tax. 

On a Roth 401K -> Roth IRA rollover, there is no tax to be paid, so this is not reported on 1040 - so following the instructions, means this line is 0 if the only thing you have on the books is a Roth 401K -> Roth IRA .

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Roth 401k and conversion ladder implications
« Reply #13 on: June 12, 2015, 09:57:17 AM »
Re-reading the line 24 instructions again.

This actually has nothing to do with Mega-Backdoor Roth - sorry for that misstatement earlier.

What it actually says in regards to rollovers:

Quote
Also include on line 24 any
amounts rolled over from a qualified
retirement plan to a Roth IRA for 2008,
2009, and 2011 to 2014 reported on
your Form 1040, Form 1040A, or Form
1040NR
, and line 21 of your 2010 Form
8606.

Emphasis mine - it is asking for the amount of rollovers that was taxable, and reported on 1040.  This is to remove the amounts of rollovers from traditional accounts on which you have already paid income tax. 

On a Roth 401K -> Roth IRA rollover, there is no tax to be paid, so this is not reported on 1040 - so following the instructions, means this line is 0 if the only thing you have on the books is a Roth 401K -> Roth IRA .

Yep you're right. Not sure where you report a rollover when you go to take distributions then. It has to be factored in somewhere.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #14 on: June 12, 2015, 10:06:03 AM »
Line 22 - you include the "investment in the contract" from designated Roth Account rollovers which I think is a fancy way of saying basis. 

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#29

example 2, they talk about "basis", then at the very end switch to "investment in the contract", and clearly means what I would mean by basis in that context. 

Maybe someone knows the technical difference between the two terms in this context?  Having a hard time finding it.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #15 on: June 12, 2015, 10:16:31 AM »
Publication 590 has this text:

Quote
basis (investment in the contract)

but that text appears only in 2 very specific sections - Military death benefits and Exxon Valdez settlement income

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Roth 401k and conversion ladder implications
« Reply #16 on: June 12, 2015, 10:28:56 AM »
Early retirement forums also tried to tackle this question.

Source

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #17 on: June 12, 2015, 10:30:22 AM »
https://www.law.cornell.edu/cfr/text/26/1.402A-1

Has the exact same examples linked above, but instead of "basis" it says "investment in the contract" everywhere. 

So maybe the law uses "investment in the contract", but someone decided "basis" or "cost" or "cost basis" was better for the forms and website and such, but it got missed in a few places?

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Roth 401k and conversion ladder implications
« Reply #18 on: June 12, 2015, 10:33:50 AM »
https://www.law.cornell.edu/cfr/text/26/1.402A-1

Has the exact same examples linked above, but instead of "basis" it says "investment in the contract" everywhere. 

So maybe the law uses "investment in the contract", but someone decided "basis" or "cost" or "cost basis" was better for the forms and website and such, but it got missed in a few places?

I had linked to that above too. The problem is that that defines things only with governmental plans. Nothing is stated about 401k's in there.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #19 on: June 12, 2015, 10:38:04 AM »
Answer to question 1:

Quote
A-1. A designated Roth account is a separate account under a qualified cash or deferred arrangement under a section 401(a) plan, or under a section 403(b) plan, to which designated Roth contributions are permitted to be made in lieu of elective contributions and that satisfies the requirements of § 1.401(k)-1(f) (in the case of a section 401(a) plan) or § 1.403(b)-3(c) (in the case of a section 403(b) plan).

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Roth 401k and conversion ladder implications
« Reply #20 on: June 12, 2015, 10:42:20 AM »
Answer to question 1:

Quote
A-1. A designated Roth account is a separate account under a qualified cash or deferred arrangement under a section 401(a) plan, or under a section 403(b) plan, to which designated Roth contributions are permitted to be made in lieu of elective contributions and that satisfies the requirements of § 1.401(k)-1(f) (in the case of a section 401(a) plan) or § 1.403(b)-3(c) (in the case of a section 403(b) plan).

So that defines a designated Roth account being under a 401(a) plan or a 403(b) plan which satisfies the requirements of 1.401(k)-1(f) which is just another section of the CFR.

MDM

  • Walrus Stache
  • *******
  • Posts: 9494
Re: Roth 401k and conversion ladder implications
« Reply #21 on: June 12, 2015, 10:47:16 AM »
See also http://www.irs.gov/irb/2007-22_IRB/ar07.html for some good quotes.

Clarification that "basis" = "allocable to investment"
Quote
...to the extent allocable to investment in the contract (basis).

Clarification that "allocable to income" means "allocable to income on the contract" - not allocable to income on Form 1040 or any other place.  This may not be particularly germane to this discussion, but it had been unclear to me on another issue.
Quote
the portion of any distribution that is includible in gross income as an amount allocable to income on the contract and the portion not includible in income as an amount allocable to investment in the contract

And to the main question of "how much of the Roth 401k becomes 'basis' when rolled over to a Roth IRA:
Quote
the amount of the rollover contribution allocated to investment in the contract in the recipient designated Roth account is the amount that would not have been includible in gross income (determined without regard to section 402(e)(4)) if the distribution had not been rolled over. Thus, if an amount that is a qualified distribution is rolled over, the entire amount of the rollover contribution is allocated to investment in the contract.
In other words, if you are over 59.5 (more correctly: meet the definition given in http://www.irs.gov/publications/p590/ch02.html#en_US_2013_publink1000231061) then the entire Roth 401k balance is treated as basis in the Roth IRA.  Otherwise, only your Roth 401k contributions are treated as basis in the Roth IRA.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #22 on: June 12, 2015, 10:57:04 AM »
MDM - thanks - how did you find that?

Just a general point for the discussion - a 401(k) is a 401(a) plan - just a very specific type of 401(a).

Spork

  • Walrus Stache
  • *******
  • Posts: 5753
    • Spork In The Eye
Re: Roth 401k and conversion ladder implications
« Reply #23 on: June 12, 2015, 11:02:33 AM »
I have a related followup question:

Can you just roll that Roth 401k into an existing Roth IRA that already has many years of contributions?  Or does that just make a complicated accounting mess?  (I.e., is it better to create a new Roth to roll into?)

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #24 on: June 12, 2015, 11:12:22 AM »
Spork - with IRAs, it doesn't matter how many different accounts you have, for tax purposes, you've got 1 Roth IRA.  I'm going to roll-over into my existing account at Vanguard when the time comes.

That has the implication that you really do need to track your Roth Basis and conversions on your own.  Goes double if you have multiple accounts.  For example - how would Vanguard know if you took a distribution from your account at Fidelity?  How does Vanguard even know that you don't have another Roth IRA account somewhere?  They don't.  And since for tax purposes it is all aggregated, it is on you, the only party that knows about all of your accounts everywhere with any certainty to track this yourself.

MDM

  • Walrus Stache
  • *******
  • Posts: 9494
Re: Roth 401k and conversion ladder implications
« Reply #25 on: June 12, 2015, 11:30:17 AM »
MDM - thanks - how did you find that?
Googled     a designated Roth account that is treated as investment in the contract

It was the third link.

dandarc

  • Magnum Stache
  • ******
  • Posts: 3442
  • Age: 36
Re: Roth 401k and conversion ladder implications
« Reply #26 on: June 12, 2015, 11:32:32 AM »
Cool - guess my particular terms weren't quite as good maybe.  Or I just missed it.

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4838
  • Age: 34
  • Location: Seattle, WA
Re: Roth 401k and conversion ladder implications
« Reply #27 on: June 12, 2015, 11:57:30 AM »
Another source: https://www.law.cornell.edu/cfr/text/26/1.408A-10

Quote
Q-3. For purposes of the ordering rules on distributions from Roth IRAs, what portion of a distribution from a rollover contribution from a designated Roth account is treated as contributions?

A-3. (a) Under section 408A(d)(4), distributions from Roth IRAs are deemed to consist first of regular contributions, then of conversion contributions, and finally, of earnings. For purposes of section 408A(d)(4), the amount of a rollover contribution that is treated as a regular contribution is the portion of the distribution that is treated as investment in the contract under A-6 of § 1.402A-1, and the remainder of the rollover contribution is treated as earnings. Thus, the entire amount of any qualified distribution from a designated Roth account that is rolled over into a Roth IRA is treated as a regular contribution to the Roth IRA. Accordingly, a subsequent distribution from the Roth IRA in the amount of that rollover contribution is not includible in gross income under the rules of A-8 of § 1.408A-6.

If you're old (or disabled) enough to make qualified distributions, the entire amount rolled over is considered a contribution. Otherwise only your basis is considered a contribution and the rest is considered earnings.

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Roth 401k and conversion ladder implications
« Reply #28 on: June 12, 2015, 12:02:32 PM »
See also http://www.irs.gov/irb/2007-22_IRB/ar07.html for some good quotes.

Good lord that's a crapton to read...

Sigh...

Needs me some coffee and notepad(s).

MrMoogle

  • Handlebar Stache
  • *****
  • Posts: 1113
  • Age: 34
  • Location: Huntsville, AL
Re: Roth 401k and conversion ladder implications
« Reply #29 on: June 12, 2015, 12:38:48 PM »
So for young people, your Roth 401k contributions become your Roth IRA contributions and Roth 401k earnings become Roth IRA earnings.

And if you're old enough, it doesn't matter anyway since you can withdraw earnings penalty free.

TaronM

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Roth 401k and conversion ladder implications
« Reply #30 on: December 03, 2015, 03:50:06 PM »
Sorry to bump an old topic but I've been searching everywhere to figure this out and there seems to be very little info out there about this.

I had a Roth 401k at my previous employer and last year (2014) I rolled it over into a Roth IRA + a Traditional IRA (since it also had pre-tax money in it from employer match), taking advantage of the IRS allowing direct rollover and splitting of funds in this way.

I received 2 1099R's from my old 401k custodian:

* Box 1 - $20,000, distribution code G, 0 Taxable (this was rolled into a Traditional IRA)
* Box 1 - $50,000, distribution code H, 0 taxable (this was rolled into a Roth IRA)

My IRA custodian filed 2 Form 5498's, which just said:

* Line 2 - Rollover contributions...$20,000, Line 7 IRA Type...IRA
* Line 2 - Rollover contributions...$50,000, Line 7 IRA Type...ROTH IRA

None of this ended up on my 1040 at all as it was a totally non-taxable event.

Okay, so the $20,000 is irrelevant, the concern is of course the $50,000 that went into the Roth.

The problem is, no one seems to know how much of that $50k was contributed from my paychecks, and how much was from investment gains.  My IRA custodian said they didn't receive that information as part of the rollover (just the total amount), and I even called my old 401k custodian and they didn't really know either (because they had basically inherited my Roth 401k from another custodian when the company I worked for had been bought out 6 months before I quit that job, so they only had the last 6 months of contributions on their records + the lump sum of the transfer from the first company).

As far as I can tell no one reported my contributions to the IRS either (it doesn't seem to be on my old W-2's...), so I can't even ask them, and I don't have 10 years of pay stubs to look back at to add them up manually.

Even if I did somehow figure this number out though, I wasn't sure if it was necessary, as I've seen posts like this around the internet:

The entire Roth 401k rollover is treated as one big contribution to the Roth IRA. The entire rollover is available for withdrawal tax and penalty free.

However some of this thread seem to be disagreeing with this (at least in my case as someone who is only 37!).  I've also seen conflicting info on if it should be reported as a contribution (Line 22 on Form 8606) or rollover (Line 24 of Form 8606) or both somehow.

So here's my questions:

* How much can I pull out of my Roth right now without paying any taxes, if anything?

* How much can I pull out in 5 years (well 4 now I guess, since I did the rollover last year) without paying any taxes?

* What numbers do I put on lines 22 and lines 24 of Form 8606 if/when I do take a distribution (assuming no more contributions made in the interim, for simplicity's sake)?

* What if I could eventually track down the data somehow and found, say, $35k of that $50k was from my own contributions, and the remaining $15k was from earnings before I converted, would that change anything?

* If I really can't get any more data than I already have though, am I just screwed on using laddering because I can't honestly tell the IRS how much of my Roth is truly basis vs gains?

Thanks in advance for anyone that can help clear this up!
« Last Edit: December 05, 2015, 09:31:07 AM by TaronM »

MDM

  • Walrus Stache
  • *******
  • Posts: 9494
Re: Roth 401k and conversion ladder implications
« Reply #31 on: December 03, 2015, 07:30:43 PM »
I had a Roth 401k at my previous employer and last year (2014) I rolled it over into a Roth IRA + a Traditional IRA (since it also had post-tax money in it from employer match)....
Just checking: that was pre-tax money from the employer match, correct?

Quote
As far as I can tell no one reported my contributions to the IRS either (it doesn't seem to be on my old W-2's...), so I can't even ask them (as far as I can tell), and I don't have 10 years of pay stubs to look back at to add them up manually.
Even if I did somehow figure this number out though, I wasn't sure if it was necessary, as I've seen posts like this around the internet:
The entire Roth 401k rollover is treated as one big contribution to the Roth IRA. The entire rollover is available for withdrawal tax and penalty free.
Pretty sure we decided that statement is not universally true, as the notes in the thread following that post indicate, and as you state below.

Quote
However some of this thread seem to be disagreeing with this (at least in my case as someone who is only 37!).  I've also seen conflicting info on if it should be reported as a contribution (Line 22 on Form 8606) or rollover (Line 24 of Form 8606) or both somehow.

So here's my questions:

* How much can I pull out of my Roth right now without paying any taxes, if anything?
The amount of your contribution.

Quote
* How much can I pull out in 5 years (well 4 now I guess, since I did the rollover last year) without paying any taxes?
The amount of your contribution.

Quote
* What numbers do I put on lines 22 and lines 24 of Form 8606 if/when I do take a distribution (assuming no more contributions made in the interim, for simplicity's sake)?
Line 22 is for Roth contributions.  Line 24 is for conversions from traditional to Roth.  See https://www.irs.gov/pub/irs-prior/f8606--2014.pdf and https://www.irs.gov/pub/irs-pdf/i8606.pdf.

Quote
* What if I could eventually track down the data somehow and found, say, $35k of that $50k was from my own contributions, and the remaining $15k was from earnings before I converted, would that change anything?
As far as I can tell, you have to do this - or at least make a reasonable, good faith estimate of those amounts.

Quote
* If I really can't get any more data than I already have though, am I just screwed on using laddering because I can't honestly tell the IRS how much of my Roth is truly basis vs gains?

Thanks in advance for anyone that can help clear this up!
There are various ways you could reasonably (or at least conservatively) estimate your contributions.  Your call on which of these (or any other) seems best, based on your own knowledge and memory:
 - contributed same dollar amount each year
 - contributed same fraction of pay each year
 - increased dollar amount by a constant [ratio / amount] each year
 - increased fraction of pay by a constant [ratio / amount] each year
 - calculate the minimum contribution needed to have achieved the account balance at the time from which you have records.  Use the historical returns for the funds in which you were invested.
 - etc.

TaronM

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Roth 401k and conversion ladder implications
« Reply #32 on: December 03, 2015, 08:00:50 PM »
Just checking: that was pre-tax money from the employer match, correct?

Yeah, my bad, I corrected that.

Curse my younger self for not taking my investments more seriously!  Probably should have just used a normal 401k, I was sold on the Roth being a better option somehow.  Missed out on some good investment growth there... oh well, I guess technically I have a bit of a head start on the laddering though heh.  Totally didn't think I needed to track my contributions either.  Well, live and learn.  Looks like I have a bit of digging ahead of me...

Okay, so assuming I will eventually figure out the actual contributions I made to the Roth 401k, and let's say it was ~$35k, that means, if I've got this all right...

* I can take out up to $35k right now, because it counts as contribution rather than rollover so no 5 year waiting period.
* I would report the $35k on Form 8606 Line 22
* I would report $0 on Form 8606 Line 24
* The rest of the $50k ($15k) I can't access tax-free until 59 1/2

That sound correct?

I think what really threw me is the Form 5498 filed by my IRA custodian.  It just states:

Quote
2.Rollover contributions.........................................................$50,003.64
 7.IRA Type.........................................................................ROTH IRA

Which looks exactly the same as a Form 5498 for a Traditional 401k to Roth rollover my wife did a few years earlier, which looked like this:

Quote
2.Rollover contributions.........................................................$10,085.92
 7.IRA Type.........................................................................ROTH IRA

This is what lead me to initially believe the random posts I'd seen elsewhere online that indicated I should treat the full $50k as a rollover contribution on Line 24, only accessible after 5 years.  It just seemed sensible that if they were reported to the IRS in the exactly same way that then they'd be used in the same way on Form 8606.  I kept digging until I found this thread though because it just seemed unlikely that the IRS would let me get away with pulling out investment gains early with no penalty at all, had to be too good to be true right?  It would seem the key difference is that the $10k was reported on our 1040 as taxable and the $50k was not.
« Last Edit: December 03, 2015, 08:03:48 PM by TaronM »

MDM

  • Walrus Stache
  • *******
  • Posts: 9494
Re: Roth 401k and conversion ladder implications
« Reply #33 on: December 03, 2015, 10:02:06 PM »
...
That sound correct?
Yes.

Quote
I kept digging until I found this thread though because it just seemed unlikely that the IRS would let me get away with pulling out investment gains early with no penalty at all, had to be too good to be true right?  It would seem the key difference is that the $10k was reported on our 1040 as taxable and the $50k was not.
Yes again. 

Good luck on the contribution reconstruction.  If you err on the side of underestimating contributions (thus overestimating returns) you should be ok with the IRS - but, as always, IANAL so....

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4838
  • Age: 34
  • Location: Seattle, WA
Re: Roth 401k and conversion ladder implications
« Reply #34 on: December 04, 2015, 09:15:30 AM »
As far as I can tell no one reported my contributions to the IRS either (it doesn't seem to be on my old W-2's...), so I can't even ask them (as far as I can tell), and I don't have 10 years of pay stubs to look back at to add them up manually.

This is strange. Those Roth contributions are supposed to be reported in Box 12 of the W-2 with code "AA". You might want to double-check this just to be sure.

Spork

  • Walrus Stache
  • *******
  • Posts: 5753
    • Spork In The Eye
Re: Roth 401k and conversion ladder implications
« Reply #35 on: December 04, 2015, 10:22:18 AM »
As far as I can tell no one reported my contributions to the IRS either (it doesn't seem to be on my old W-2's...), so I can't even ask them (as far as I can tell), and I don't have 10 years of pay stubs to look back at to add them up manually.

This is strange. Those Roth contributions are supposed to be reported in Box 12 of the W-2 with code "AA". You might want to double-check this just to be sure.

I know this was between you and TaronM, but I have exactly the same situation.

Seattlecyclone:  That may have been common knowledge or something I should have known already but between that Box12/AA quote above and what you've written about ACA, I am pretty damn sure I now owe you at least one beer.  Thanks!

seattlecyclone

  • Magnum Stache
  • ******
  • Posts: 4838
  • Age: 34
  • Location: Seattle, WA
Re: Roth 401k and conversion ladder implications
« Reply #36 on: December 04, 2015, 10:50:10 AM »
No problem. I'm always happy to accept gifts of beer.

TaronM

  • 5 O'Clock Shadow
  • *
  • Posts: 40
Re: Roth 401k and conversion ladder implications
« Reply #37 on: December 04, 2015, 10:50:34 AM »
As far as I can tell no one reported my contributions to the IRS either (it doesn't seem to be on my old W-2's...), so I can't even ask them (as far as I can tell), and I don't have 10 years of pay stubs to look back at to add them up manually.

This is strange. Those Roth contributions are supposed to be reported in Box 12 of the W-2 with code "AA". You might want to double-check this just to be sure.

Oh yeah?  Huh, well, I'll definitely check into that more closely!  If that's true, hopefully I have tax records still around from back when I started at that job...  Thanks for the tip!
« Last Edit: December 04, 2015, 10:58:47 AM by TaronM »