Roth 401(k) Rollover?

[beach2133]

I posted this in the 'Ask a Mustachian' board, but got no takers...maybe too complex!  I'll try it on this board to see if anyone has any ideas/thoughts.

I've done a couple google searches and can't seem to find a clear answer on the complexities of a 401(k) rollover to IRA(s) that have both Roth and Traditional contributions.  Here's my question:

With the understanding that Roth 401(k) contributions can be withdrawn tax and penalty free (pending the account is >5 years old), do those contributions retain that ‘Roth contribution’ status if they are rolled into a Roth IRA, or are they considered a ‘Roth Conversion’ and subject to a 5 year waiting period before they can be withdrawn penalty free?  For example, if I have a company sponsored 401(k) with the following classifications:

1)   After Tax Roth Contributions - $25,000
2)   Roth Earnings - $5,000
3)   Before Tax Contributions - $25,000
4)   Before Tax Earnings - $5,000
5)   Company Match $10,000

Is it possible to roll this account into separate IRAs?
A) Roth Items (1 & 2) into Roth IRA
B) Before Tax items (3, 4 & 5) into Traditional IRA


If that is possible, would item 1 be eligible for immediate withdrawal penalty and tax free (assuming the Roth IRA is >5 years old)?  Or would it be treated as a conversion and thus subject to a 5 year waiting period before it can be withdrawn penalty and tax free?

Your question for me might be "Why would you do this?  Just leave it in the account that it's in and just withdraw the Roth contributions."  The reason I'm considering this is because these funds are in a employer sponsored 401(k) with poor investment options.

Any advice or answers would be helpful!

[dandarc]

Short answer is yes - when you rollover, you can rollover the Roth money (all of it) to a Roth IRA, and the Traditional money (again all of it) to a Traditional IRA.

Slightly longer addendum:
You have a misconception regarding the Roth 401K - namely, you cannot withdraw contributions to a Roth 401K without penalty until you reach age 59.5 (hardship and a couple other exceptions notwithstanding).  Non-qualified distributions from a Roth 401K are always pro-rated - you get some earnings and some basis.

But there is a solution - roll the Roth 401K to a Roth IRA, and suddenly, your basis in the Roth 401K becomes regular Roth IRA contributions, which can be withdrawn tax and penalty free at any time.

ETA:Be sure to keep good records of your Roth IRA basis - nobody's doing this for you, so if you want to withdraw the contributions down the road but before age 59.5, you'll need to have those records.

[beach2133]

Thanks for the response.  Like I said, I google'd this in a few different ways and couldn't find this scenario.

One followup to make sure I'm understanding:

In my scenario, I would roll items 1 ($25000 Roth Contributions) & 2 ($5000 Roth Earnings) into my Roth IRA and items 3 ($25000 Pre-Tax Contributions), 4 ($5000 Pre-Tax Earnings) & 5 ($10000 Employer match) into my Traditional IRA.

Are you saying that the full $30000 (Roth Contributions + Earnings) would be treated as a Roth Contribution (or basis, as you say) and be available for withdrawal immediately (tax and penalty free)?  I guess I figured at least the earnings portion ($5000) would be classified as a conversion and be subject to the 5 year conversion withdrawal rules.

Thanks again for responding!

[dandarc]

No, the $25000 Roth Contributions is your basis.  The $5000 is still earnings - if you withdraw those early, you get to pay taxes and penalties.  Period.  Nothing involving your current Roth 401K balance is a conversion.

If you were to convert some of your traditional money to Roth, then you'd have a conversion subject to the 5 year period.

[seattlecyclone]

dandarc is correct. When you roll money from a Roth 401(k) to a Roth IRA, your basis goes into the "contributions" bucket of the Roth IRA and your earnings within the 401(k) become earnings within the Roth IRA.

For a primary source on this, see Q-3 of 26 CFR § 1.408A-10.

[TheInsuranceMan]

I really appreciate this post and the explanations, as I have a Roth 401k from an old employer that I've posted on here about that I haven't done anything with.  I have about 30k in there that is vested, and about 2k that isn't vested as I left a few months earlier than being fully vested.  So, of that 30k, if I roll it all to a ROTH IRA, I can withdraw the contribution portion tax and penalty free, just not the earnings on the invested money, right?

Not that I need to withdraw it, and obviously it's a bad idea to use those funds for anything less than super high interest debt.  It always just goes through my mind that I could withdraw my contributions after I roll it to a ROTH IRA, and pay off my student loans and a good chunk of my mortgage.  However, my total monthly bill between those two is sub $500 and my interest rate peaks at 5.35% on 5k of student loan debt, the rest is 3.15% for the student loans and 2.875% for my mortgage

[dandarc]

That's about right. 

Remember that all of your employer-contributions and associated earnings is in a traditional 401K account, regardless of whether you deferred to traditional or Roth 401K.  The Roth 401K can only hold employee deferrals and attached earnings.