Author Topic: Converting Roth 401(k) to Roth IRA? As simple as it sounds?  (Read 5255 times)

militaryincome

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Converting Roth 401(k) to Roth IRA? As simple as it sounds?
« on: March 05, 2013, 08:56:09 PM »
This was really the only article I could find on the subject:
http://www.investopedia.com/articles/retirement/09/roth-401k-rollover.asp

From what I understand, I can convert my Roth 401(k) to my Roth IRA and the transferred funds will be considered contributions. Thus, as long as my Roth IRA has existed for at least 5 years, I could immediately withdraw the funds from the IRA?

Is this correct, or do they figure out which portions of the funds were contributions and which were investment gains? Or is it all considered investment gains?

FYI my Plan is the Roth TSP. I understand I can not trasfer funds until I either get out or retire from the military.

Nords

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Re: Converting Roth 401(k) to Roth IRA? As simple as it sounds?
« Reply #1 on: March 05, 2013, 10:52:37 PM »
Thus, as long as my Roth IRA has existed for at least 5 years, I could immediately withdraw the funds from the IRA?
Is this correct, or do they figure out which portions of the funds were contributions and which were investment gains? Or is it all considered investment gains?
FYI my Plan is the Roth TSP. I understand I can not trasfer funds until I either get out or retire from the military.
Yeah, this confuses the heck out of everybody.  Including me:
http://the-military-guide.com/2012/03/19/is-the-roth-thrift-savings-plan-right-for-you/

I ended up seeking clarification from USAA's CFPs.

The Roth TSP is different from the Roth IRA in that the first is a "designated Roth account".  My impression of that is you can roll it over to a Roth IRA, and then after five years you can withdraw the contributions (which have already been taxed) but not the gains.  (You can start withdrawing the gains after age 59.5, of course, but before then withdrawing the Roth IRA gains would be subject to a penalty.)  However my track record on this concept is only batting .500, so I'd recommend digging in to IRS Pub 560 and then checking with a CPA.

You already know what you've contributed to the Roth TSP from your MyPay statements or your LESs.

I believe that you're correct on being unable to transfer out of the TSP until you leave the service.  However the TSP board is eventually planning to allow people to transfer their Roth IRAs into the Roth TSP, assuming you feel that's a asset-allocation good idea.  I'm keeping an eye on this for our accounts, but they might not make it available to retirees.

The reason the subject of leaving the TSP rarely comes up is because its expense ratios are so low-- 0.025% is lower than anything even Vanguard offers.  The idea would be that you ideally wouldn't need to touch the TSP funds until you turned 59.5 in order to exploit those low expense ratios.  If you feel that you'd need cash after the military (for example, to bridge the gap between a military pension and reaching age 59.5) then you could put the money into your Roth IRA (and withdraw the contributions anytime) or into a taxable account:
http://the-military-guide.com/2013/02/14/when-do-you-stop-contributing-to-tax-deferred-accounts/

militaryincome

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Re: Converting Roth 401(k) to Roth IRA? As simple as it sounds?
« Reply #2 on: March 06, 2013, 03:18:11 AM »
Thank you for the detailed response Nords!

I'm only 24 now, but I'm just want to know all my options for the future. I'm planning to max out both Roth IRAs for my wife and I. By the time I'm 40 and eligible for retirement, that would be about $170,000 in contributions. In case I would need more before I turn 60, this looks like a good option. I found some more info on the TSP website:
https://www.tsp.gov/planparticipation/withdrawals/requestingWithdrawal.shtml
Apparently you can make a one time partial transfer, which should be enough.

I do wonder, if they do separate gains from contributions, in which order are they transferred? Do they convert the ratio of total contributions/gains to a percentage? i.e. If 60% of the money in your Roth 401(k) is contributions, (at the time of transfer) then $.60 out of each dollar you convert is considered contibutions? Or do you have to transfer all your gains/contributions one before the other? I would think the answer to this is applicable for all types of Roth 401(k)s

I understand the TSP has the lowest expense ratios, and it does work for my desired AA with my Roth IRA supplimenting it. I don't think I would leave the TSP anytime soon. Although, if I want to avoid the RMD, moving from the Roth TSP to a Roth IRA may be the best option. Again, this decision would be 45 years away for me.

I appreciate your wisdom!

Kierun

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Re: Converting Roth 401(k) to Roth IRA? As simple as it sounds?
« Reply #3 on: March 06, 2013, 05:07:50 AM »
With the low expense ratio, would you recommend rolling over a 401k plan into TSP or vanguard?  I've left the military, still a retain a TSP account, and am about to quit from my current employer.