dmertz
Level 15

Retirement tax questions

"In-plan Roth Rollovers (IRRs) are generated when an after-tax contribution to a 401K account is immediately rolled over to a Roth 401K account."

 

True, but IRRs are happen when any funds are rolled over from the traditional account in the 401(k) to the designated Roth account in the same 401(k).  I think that you address this later.

 

"IRRs are considered to be investment in the contract. Investment in the contract is the same as basis or contribution:"

 

That statement is a bit too broad since it does not account for the taxable amount of the IRR that might be subject to recapture of the early-distribution penalty.

 

"IRRs taxable are subject to penalty when(special recapture rule):

  • They were contributed < 5 years at the time of the Roth 401K → Roth IRA happened, and
  • They were distributed < 5 years after the Roth 401K → Roth IRA happened."

That is incorrect.  If what you described applied, the 5-year clock could become a 9-year clock.  The 5-year recapture clock starts at the beginning of the year in which the particular IRR occurred.  The timing of the rollover from the designated Roth account to the Roth IRA has no effect on the running of this clock.  https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts

 

I still have a bit of a problem problem that treating as contribution basis when rolled over to a Roth IRA the nontaxable part of an IRR that consists of both taxable and nontaxable parts.  Doing so produces a different result with regard to Roth IRA ordering rules than if the funds were rolled from the traditional 401(k) to a traditional IRA and then converted to Roth (when there are no other funds in traditional IRAs).  Maybe that's reasonable, though, since there is no MAGI limit on making contributions to the 401(k).