Does rolling over my Roth 401(k) to a Roth IRA restart the 5 years clock?

[FlorenG]

Hi there!

I'm giving some thought to Mad Fientist blog about the 'Mega Backdoor Roth': https://www.madfientist.com/after-tax-contributions/

If you have money in a Roth IRA, you can take the initial amount without paying taxes as long as you've waited 5 years. I believe, it is the same situation with your Roth 401(k).

If you rollover your Roth 401(k) to a Roth IRA between two different financial institutions (say Fidelity to Vanguard) does it restart the timer or do both companies share this information? Also, does the new holder of your Roth IRA get information about what was a contribution and what was growth on the transferred funds?

Thanks!

[wageslave23]

you can always take your contributions out tax free, the 5 year rule is for taking out earnings tax free.

[DreamFIRE]

It doesn't start over unless you are just starting a Roth IRA, otherwise, it inherits the holding period of existing Roth IRA in regard to earnings.

https://forum.mrmoneymustache.com/investor-alley/roth-conversion-ladder-why-not-start-early/msg1949619/#msg1949619

[FlorenG]

Thanks a bunch for the answers, but the more I read the more confused I am :(

Say I'm 30 on 2010 and open a Roth IRA. Then, on 2018 I do a backdoor deposit (put some money on an empty traditional IRA and move it soon after to the Roth before it generates any earnings). When can I take the original contribution out without paying penalties? When can I take the earnings without paying penalties? And the earnings without paying taxes? Do I have to wait until I'm 59 1/2 for the latter or can I do it sooner?

For the same questions before, what if I didn't open the Roth IRA until 2018, at the same time I do the backdoor?

And what if the money came from a Roth 401(k) that I roll over from a previous employer retirement plan and in which 80% are contributions I made after taxes and the other 20% are earnings over the last 10 years?

Thanks!

[jlcnuke]

Thanks a bunch for the answers, but the more I read the more confused I am :(

Say I'm 30 on 2010 and open a Roth IRA. Then, on 2018 I do a backdoor deposit (put some money on an empty traditional IRA and move it soon after to the Roth before it generates any earnings). When can I take the original contribution out without paying penalties? When can I take the earnings without paying penalties? And the earnings without paying taxes? Do I have to wait until I'm 59 1/2 for the latter or can I do it sooner?

For the same questions before, what if I didn't open the Roth IRA until 2018, at the same time I do the backdoor?

And what if the money came from a Roth 401(k) that I roll over from a previous employer retirement plan and in which 80% are contributions I made after taxes and the other 20% are earnings over the last 10 years?

Thanks!

Backdoor Roths (i.e. converting from Traditional to Roth) are a "conversion", not a "deposit". Each conversion starts a new 5-year clock (so the money you convert in 2018 has a 5-year clock, but if you do another conversion in 2019 it will have its own 5-year clock etc). Normal deposits do not have a 5-year clock, they're subject to the account's 5-year clock instead.

When can I take the original contribution out without paying penalties?
Anytime, for the money that was contributed to a Roth account (401k or IRA). There are no penalties or taxes associated with removing contributions only. "Conversions', however, must be left in the account for 5-years before you can remove them without penalty.


When can I take the earnings without paying penalties?
You can take earnings without penalty once it is a qualified distribution (i.e. you are 59 1/2 and the 5-year rule for the account and/or conversion is met, or meet an exception).

And the earnings without paying taxes?
You don't pay taxes on qualified distributions (59 1/2 + 5-year rule or meet an exception): no penalty, no tax.

Do I have to wait until I'm 59 1/2 for the latter or can I do it sooner?
You can do it sooner in some circumstances - primarily first time home purchase, medical expenses, or if you're doing "substantially equal periodic payments".

For the same questions before, what if I didn't open the Roth IRA until 2018, at the same time I do the backdoor?

The only thing that would change is the entire account would have the same start for the 5-year rule.

[MDM]

When can I take the original contribution out without paying penalties?
"Conversions', however, must be left in the account for 5-years before you can remove them without penalty.

That is true for money that was taxed when converted.  In other words, for a pre-tax tIRA to Roth conversion.

If one's conversions have been only backdoor Roth conversions, however, the untaxed amount converted may be withdrawn immediately (or later) from the Roth after conversion with no tax or penalty.

See http://fairmark.com/forum/read.php?2,54159,85510#msg-85510 for a summary table of Roth distribution tax rules.

[seattlecyclone]

Say I'm 30 on 2010 and open a Roth IRA. Then, on 2018 I do a backdoor deposit (put some money on an empty traditional IRA and move it soon after to the Roth before it generates any earnings). When can I take the original contribution out without paying penalties? When can I take the earnings without paying penalties? And the earnings without paying taxes? Do I have to wait until I'm 59 1/2 for the latter or can I do it sooner?

You can only take out earnings tax-free if it's a qualified distribution. The requirements for this are that you need to have a Roth IRA open for five years and also be either 59½, disabled, or dead. This five-year clock starts when you first put money from any source into any Roth IRA account. If you're alive and not disabled, make sure to do your rollover or just make a regular Roth IRA contribution before you turn 54 and this five-year rule becomes irrelevant.

And what if the money came from a Roth 401(k) that I roll over from a previous employer retirement plan and in which 80% are contributions I made after taxes and the other 20% are earnings over the last 10 years?

For distributions when you aren't old enough to take qualified distributions, the ordering rules come into play.
1) Your first withdrawals are considered to come from direct contributions, until those are completely used up.
2) Your next withdrawals are considered to come from traditional to Roth conversions, oldest first.
2a) If you converted both pre-tax and post-tax funds in the same year, the pre-tax part comes out first within that year's conversions.
3) Earnings come out last.

For your Roth 401(k) to Roth IRA rollover, the 80% that you contributed from your paycheck goes into the direct contribution bucket. The remainder goes into the earnings bucket.

The direct contribution bucket can be withdrawn at any time tax-free. Doesn't matter how long you have had your Roth IRA account.

The conversions bucket is never subject to regular income tax (you already paid this when you did the conversion). When you withdraw any conversions of pre-tax funds that you converted less than five years ago, a 10% early withdrawal tax applies.

The earnings bucket is subject to your regular income tax rates plus the 10% early withdrawal tax if you're not yet able to take a qualified distribution. Avoid withdrawing this money early if at all possible.

[MDM]

You can only take out earnings tax-free if it's a qualified distribution. The requirements for this are that you need to have a Roth IRA open for five years and also be either 59½, disabled, or dead

or taking a distribution

that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

See 2017 Publication 590-B - p590b.pdf for context.

[jlcnuke]

When can I take the original contribution out without paying penalties?
"Conversions', however, must be left in the account for 5-years before you can remove them without penalty.

That is true for money that was taxed when converted.  In other words, for a pre-tax tIRA to Roth conversion.

If one's conversions have been only backdoor Roth conversions, however, the untaxed amount converted may be withdrawn immediately (or later) from the Roth after conversion with no tax or penalty.

See http://fairmark.com/forum/read.php?2,54159,85510#msg-85510 for a summary table of Roth distribution tax rules.

I've seen some places saying that's correct, and other places (including law firms and investing or accounting firms) saying that isn't how the law works or not specifically addressing it (generally they seem to treat all conversion amounts the same). I'd check with the IRS before risking it personally, but I don't expect to have to concern myself with it thankfully.

[seattlecyclone]

You can only take out earnings tax-free if it's a qualified distribution. The requirements for this are that you need to have a Roth IRA open for five years and also be either 59½, disabled, or dead

or taking a distribution

that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

See 2017 Publication 590-B - p590b.pdf for context.

Oh yeah, I always forget about that one. You can dip into $10k of earnings once ever if you're a "first-time homebuyer," technically defined as someone who bought a home this year and has not owned one for at least the previous two years.

[FlorenG]

THANKS!

All right, I prepared a table with different options (see attachment.)

To simplify, let's assume that we are looking at a single contribution/conversion (I want to get the basics right first) and that I'm not dying, becoming disabled or tapping into my Roth to buy a house before I'm 59.5 years old.

Also, assume that the Roth is opened with no funds in it until the rollover or direct contribution is performed in 2018.

Did I get it right?      Partly at least?

[DreamFIRE]

THANKS!

All right, I prepared a table with different options (see attachment.)

To simplify, let's assume that we are looking at a single contribution/conversion (I want to get the basics right first) and that I'm not dying, becoming disabled or tapping into my Roth to buy a house before I'm 59.5 years old.

Also, assume that the Roth is opened with no funds in it until the rollover or direct contribution is performed in 2018.

Did I get it right?      Partly at least?

No, as mentioned in earlier comments and referenced thread, you don't have to wait to withdraw contributions to a 401K Roth that are rolled over to a Roth IRA.  That is not the same as a tIRA to Roth IRA conversion.  The holding time would only apply to the earnings that were rolled over.

[FlorenG]

I'm trying, I'm trying...

I corrected it, is it good now?

[MDM]

When can I take the original contribution out without paying penalties?
"Conversions', however, must be left in the account for 5-years before you can remove them without penalty.

That is true for money that was taxed when converted.  In other words, for a pre-tax tIRA to Roth conversion.

If one's conversions have been only backdoor Roth conversions, however, the untaxed amount converted may be withdrawn immediately (or later) from the Roth after conversion with no tax or penalty.

See http://fairmark.com/forum/read.php?2,54159,85510#msg-85510 for a summary table of Roth distribution tax rules.

I've seen some places saying that's correct, and other places (including law firms and investing or accounting firms) saying that isn't how the law works or not specifically addressing it (generally they seem to treat all conversion amounts the same). I'd check with the IRS before risking it personally, but I don't expect to have to concern myself with it thankfully.

The "biglaw" article is, unfortunately, wrong.

To confirm that, see Recapture amount subject to the additional tax on early distributions.:
If you converted or rolled over an
amount to your Roth IRAs in 2013
through 2017 and you received an early
distribution for 2017, the recapture
amount you must include on line 1 is the
amount, if any, of the early distribution
allocated to the taxable portion of your
2013 through 2017 conversions or
rollovers.

In other words, Roth distributions from non-taxable conversions - which is what a backdoor Roth is - are not taxable.

This does get complicated when there are Ordering Rules for Distributions involved, but for a "clean" backdoor Roth there is neither tax nor penalty when withdrawing the converted amount from the Roth.

[jlcnuke]

When can I take the original contribution out without paying penalties?
"Conversions', however, must be left in the account for 5-years before you can remove them without penalty.

That is true for money that was taxed when converted.  In other words, for a pre-tax tIRA to Roth conversion.

If one's conversions have been only backdoor Roth conversions, however, the untaxed amount converted may be withdrawn immediately (or later) from the Roth after conversion with no tax or penalty.

See http://fairmark.com/forum/read.php?2,54159,85510#msg-85510 for a summary table of Roth distribution tax rules.

I've seen some places saying that's correct, and other places (including law firms and investing or accounting firms) saying that isn't how the law works or not specifically addressing it (generally they seem to treat all conversion amounts the same). I'd check with the IRS before risking it personally, but I don't expect to have to concern myself with it thankfully.

The "biglaw" article is, unfortunately, wrong.

To confirm that, see Recapture amount subject to the additional tax on early distributions.:
If you converted or rolled over an
amount to your Roth IRAs in 2013
through 2017 and you received an early
distribution for 2017, the recapture
amount you must include on line 1 is the
amount, if any, of the early distribution
allocated to the taxable portion of your
2013 through 2017 conversions or
rollovers.

In other words, Roth distributions from non-taxable conversions - which is what a backdoor Roth is - are not taxable.

This does get complicated when there are Ordering Rules for Distributions involved, but for a "clean" backdoor Roth there is neither tax nor penalty when withdrawing the converted amount from the Roth.

Thanks :)

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[DreamFIRE]

I'm trying, I'm trying...

I corrected it, is it good now?

It looks like your backdoor Roth needs updated per other comments in this thread as MDM noted.

[FlorenG]

OK, we might be getting something. Following the comments here I prepared (yet) another table (attached), this time I added the difference between converting pre-tax or post-tax contributions from tIRA to Roth-IRA.

To simplify, let's assume that we are looking at a single contribution/conversion and that I'm not dying, becoming disabled or tapping into my Roth to buy a house before I'm 59.5 years old.

Also, assume that the Roth is opened with no funds in it until the rollover or direct contribution is performed in 2018.

Also, given how useful it is, I'm repeating this info from MDM:

For distributions when you aren't old enough to take qualified distributions, the ordering rules come into play.
1) Your first withdrawals are considered to come from direct contributions, until those are completely used up.
2) Your next withdrawals are considered to come from traditional to Roth conversions, oldest first.
2a) If you converted both pre-tax and post-tax funds in the same year, the pre-tax part comes out first within that year's conversions.
3) Earnings come out last.

[dude]

Here's the best article I've seen on the subject:

https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

[MDM]

Here's the best article I've seen on the subject:

https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/

That is indeed a good article for what it covers.  It does not, however, address the tax treatment of withdrawals following a backdoor Roth.

[MDM]

OK, we might be getting something. Following the comments here I prepared (yet) another table (attached), this time I added the difference between converting pre-tax or post-tax contributions from tIRA to Roth-IRA.

If it matches the one in the Fairmark article, then it is likely correct.