Does the 5 year window of a 457(b), 457 Roth, account get reset when a 457(b) account is rolled over to a traditional Roth IRA?

[dmertz]

The 5-year beginning date for qualification of the Roth 457(b) account does not transfer to the Roth IRA when the Roth 457(b) account is rolled over to the Roth IRA.  The beginning of the 5-year qualification period for your Roth IRAs begins on January 1 of the year for which your first contribution to the Roth IRA is made.  If the rollover establishes your first Roth IRA, the 5-year Roth IRA qualification period will start on January 1 of the year in which the deposit is made to the Roth IRA.

Any 5-year holding period for In-plan Roth Rollovers in the 457(b) does carry over to the Roth IRA as a conversion holding period when rolled over.

If the distribution from the Roth 457(b) would be a qualified distribution (both the 5-year and age 59½ requirements have been met) if not rolled over, the entire amount rolled over to the Roth IRA becomes contribution basis in the Roth IRA, otherwise only the contribution basis from the Roth 457(b) becomes contribution basis in the Roth IRA.

[turbineinfo]

Insightful answer! Thank you.

I’m trying to digest. Please allow me to clarify.
I am over 59.5 and retired.

While employed, The first 457(b) contribution date was February 1, 2017. 
The 457(b) account was kept with the original custodian.

On March 10, 2022, my 457(b) was directly rolled-over to a Roth Contributory IRA, new custodian.

I understand your answer to say that any holding period time with the original custodian does carry over to the new brokerage firm.

The new custodian says that If I take a distribution from this Roth Contributory account, it will be reported on a 1099R, box 7 coded as “T” (exclusions apply).

I have monthly statement showing the first 457(b) contribution as well as a letter from the original custodian.

May I ask…What are the mechanics to demonstrate to the IRS that the full 5 year holding period has been met?

I have used TurboTax for years but have never faced this situation.

Thank you for your thoughtful insights!

[dmertz]

"I understand your answer to say that any holding period time with the original custodian does carry over to the new brokerage firm."  You misunderstand.  See the first sentence of my previous reply where I underlined the word "not."

Since you have not said otherwise, I assume that the rollover in March 2022 established your first Roth IRA.  That means that your Roth IRAs are not qualified until 2027.  Because you met the qualification requirements in the Roth 457(b), the entire amount rolled over to the Roth IRA became contribution basis in your Roth IRAs.   You can take that out at any time without tax or penalty.  However, any earnings distributed from your Roth IRAs before 2027 (after having distributed all of your basis) will be taxable (but not subject to any early-distribution penalty).  When entering any code-T distribution into any version of TurboTax prior to 2027 TurboTax you'll need to answer No to the question that TurboTax asks to determine if you met the 5-year qualification period for your Roth IRAs.

The IRS determines your 5-year Roth IRA qualification period as beginning on January 1 of the first year for which a Form 5498 indicating some type of Roth IRA contribution is filed with the IRS by your Roth IRA custodian, January 1, 2022, in your case.

[turbineinfo]

Again, thank you for helping me understand more.

Please allow me to re-phrase.

Example:

The 457(b) amount rolled over to the Roth Contributory accounts =$10,000

Earnings generated within the new Roth Contributory account =$500

The $10,000 amount that was directly rolled into the new Roth Contributory account has satisfied the 5 year holding period and is not taxable (e.g. qualified). The $500 earnings, generated by that amount rolled over will need a separate 5 year period to be free from taxation. These earnings will become qualified in 2027.
I would understand then, that this new Roth Contributory account is a mixture of qualified (amount rolled over) and non-qualified amounts (earnings).

However, I understand, from speaking with the new custodian, my 1099R will be coded ‘T” in box

7 even if I only take a distribution of the qualified amount (the $10,000).

If I only take a distribution of $10,000, I’m confused by why I would answer “No” to the question….‘Have you met the 5 year qualification period’.   I understand that the $10,000 was qualified under the old 457(b) plan.

I’m unclear about the statement :

’When entering any code-T distribution into any version of TurboTax prior to 2027 TurboTax you'll need to answer No to the question that TurboTax asks to determine if you met the 5-year qualification period for your Roth IRAs.’

Does this statement above also apply to the $10,000 from the original 457(b) plan?  By my understanding it does not apply, the statement above only applies to the $500 earnings.

May I ask for clarification.

 Thanks so much for your input!

[dmertz]

"The $10,000 amount that was directly rolled into the new Roth Contributory account has satisfied the 5 year holding period and is not taxable (e.g. qualified)."  Not really.  The fact that the distribution from the Roth 457(b) was qualified transforms the entire $10,000 (regardless of the composition of the $10,000 in terms of contributions or earnings) into contribution basis in the Roth IRA, but this $10,000 has not yet met the Roth IRA 5-year holding period.  Because it is contribution basis, it can be taken out of the Roth IRA without being taxable whether or not it has met the Roth IRA 5-year qualification period.  Contribution basis comes out first under the Roth IRA ordering rules.

"The $500 earnings, generated by that amount rolled over will need a separate 5 year period to be free from taxation."  There is only one 5-year holding period for Roth IRA qualification, and that began on January 1, 2022.  It's just that contribution basis is never taxable when distributed, even if the Roth IRA 5-year qualification period has not been met, so the first $10,000 distributed will not be taxable even if done before your Roth IRAs become qualified in 2027.

The rollover from the Roth 457(b) to the Roth IRA, if done as a direct rollover, was reported with code H in box 7 of the 2022 Form 1099-R.  (Had the rollover been done indirectly, which is uncommon, the Form 1099-R would instead have codes 7 and B.)

Note that it's your responsibility to track your contribution basis in your Roth IRAs.  Until 2027 when your Roth IRAs will have completed the 5-year qualification period you must file Form 8606 Part III if you take any money out of your Roth IRAs.  That's accomplished by answering No as I described in my previous reply . If your 2022 Form 1099-R reporting the distribution from the Roth 457(b) had an amount in box 5, it should have been equal to the amount in box 1 and TurboTax will record this as Roth IRA contribution basis.

[turbineinfo]

Dmertz, amazing explanation!

Thank you again.

I have a better understanding of the formal mechanics involved.  I say “better” but not complete.

From my simplistic perspective, I expected a rollover from a 457(b) Roth to a Roth Contributory account to be an Apples to Apples transaction, the 5 year holding period having been met by the one account would transfer to the other.

Cheers Indeed!

[dmertz]

Although they serve essentially the same purpose, the 5-year qualification period does not transfer because the 5-year qualification period for the Roth 457(b) and the 5-year qualification period for the Roth IRA have independent requirements established in entirely different sections of the tax code from each other.

[turbineinfo]

Does the custodian of a 457(b) also file Form 5498 to the IRS or does this form only apply to Roth IRA’s?

 I’ve tried to research this but don’t see a clear answer.

Thanks

[dmertz]

The title of Form 5498 is "IRA Contribution Information." As such, it applies only to IRAs, not to 457(b) plans.  A 457(b) plan is not an IRA.