The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: patricles on July 19, 2016, 09:00:28 PM
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I've searched extensively for the answer to this question, including IRS sites, but haven't found it explicitly answered. I'm hoping the MMM community can help me out.
I'm self employed with a individual 401k, traditional and Roth, which allows me to supercharge my tax sheltered investments. I also currently have a Roth IRA that has been open for >5 years. I intend to FIRE in 10 years in my late 30s, with the majority of my savings in the traditional i401k which I will access using a Roth conversion ladder. I'll withdraw from my taxable brokerage account and withdraw the contributions to my Roth IRA to cover my expenses for the first 5 years of the conversion ladder. What I'm stuck on is whether and how I'll be able to utilize my Roth i401k contributions to cover those first 5 years. If I roll my entire Roth i401k into my Roth IRA, how will the the Roth i401k contributions and earnings be considered in the Roth IRA withdrawal ordering? I know the ordering is as follows:
1. Regular Roth IRA participant contributions
2. Taxable conversion and rollover amounts (I believe this would be the conversions from my traditional i401k)
3. Nontaxable conversion and rollover amounts
4. Earnings on all Roth IRA assets
It seems to me the Roth 401k contributions COULD be 1 or 3, and the Roth 401k earnings would be 4. What is correct? If the converted Roth 401k contributions are order 1 then I can access them during my 5 year ladder wait period and further reduce the amount I have to save in my brokerage to further limit taxes on my earnings until FIRE. If however the Roth 401k contributions are order 3 then my traditional 401k conversions would be accessed first and I'd have to pay a penalty if the 5 year wait period wasn't finished. Can anyone clarify this for me? I'd be very grateful.
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The answer to your question is at Q-3 of 26 CFR 1.408A-10 (https://www.law.cornell.edu/cfr/text/26/1.408A-10). If you roll money from a "designated Roth account" (such as a Roth 401(k)) into a Roth IRA, any amount that was "investment in the contract" within the designated Roth account (i.e. your contributions) will count as contributions for the purpose of the Roth IRA withdrawal ordering rules.
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Thanks Seattlecyclone, that was exactly the answer I was looking (and hoping) for. Reading legalese is tough, thanks for breaking it down in laymans terms as well.