401k to Roth IRA Conversion over 60- 5 year rule?

Forum|Forum|1 year ago
September 25, 2024
1 reply
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I have seen a couple conflicting answers to this.

Assume

I am 60.

I convert part of a regular 401k to a Roth IRA.

I have other Roth IRAs from many years ago.

Can I access the rolled over amount almost immediately? How about any earnings?

Or do I have to wait 5 years for one both ( and if I don’t wait, what happens? Tax? Penalty?).

I have read and seen many conflicting answers on this, so hope to be pointed to the IRS doc that confirms

user17759332250

Level 4

You CAN access the rolled over amount immediately, but you will also have penalties if the amount you are withdrawing hasn't been held for the required amount of time to be a qualified distribution. If you convert part of your 401(k) to a ROTH IRA, you're still under the 5 year rule since the funds are "new".

As far as the earnings go, when you withdraw funds you can't "choose" which part of the funds you are withdrawing (contribution v. earnings). The converted amount will contain both contribution and earnings.

The amount you are converting will produce a taxable event in the year you are converting to a ROTH because your 401(k) funds were pre-tax. So you'll have to pay tax on the amount you are converting.

If you take a distribution from the ROTH before the end of the 5 year period, it's called a nonqualified distribution. You have to include the earnings part of your conversion in your gross income, but the basis is not included.

Following is the IRS guidance on this subject.
IRS Retirement Plan FAQs on Designated ROTH Accounts

IRS Rollovers of retirement plan and IRA distributions

The thing to remember is, it's your money, if you need it, it's there for you. You will pay a bit more, tax-wise, but if you need it, you can use it.

Tracer-xAuthor

Level 3

Thanks so much!

just to be sure I’m following-

if I rollover 100k from my 401k to a Roth, I of course pay tax on the $100k—- then, if I want to avoid any penalties… I have to leave the 100k AND any earnings alone for 5 years.

If , say in 3 years the 100k had grown to $125k. If I take out $50k,….. does that mean I have to include $25,000 in my gross income that year?

user17759332250

Level 4

Under the present tax law, and assuming you are over 59.5 years old, nonqualified distributions are subject to your standard income tax rate. That, of course, depends on your overall taxable income.

If you are not yet 59.5, then an additional 10% penalty would also apply.