@dmertz wrote:"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.
That's correct, but I clarified that IRR has a taxable and non-taxable amount in my post.
"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 stand corrected. I was wrong. I thought the IRR clock would reset when the Roth 401K -> Roth IRA rollover occurred, but it does not.
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).
The confusing part is that the IRRs are reported in box 22 of form 8606, not in box 24. However, that doesn't mean all IRRs can be taken penalty-free. The special recapture rule targets the taxable part of the IRR. The other bit that's confusing is that I was expecting the taxable amount of the IRR to be reported in a different box when the Roth 401K --> Roth IRA occurred. Still, I couldn't find any guidance on that, so the only option is to report the entire amount in box 22 and then follow the special recapture rule.
