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I am 72 years old and must take RMDs from my solo Roth 401K that I opened last year. Since it does not meet the 5 yr rule, will I owe tax on earnings and 10% penalty?

I'm also not sure if I can roll this solo Roth 401K into my Roth IRA and if so, can I continue contributions by opening a new solo Roth IRA?
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1 Best answer

Accepted Solutions
dmertz
Level 15

I am 72 years old and must take RMDs from my solo Roth 401K that I opened last year. Since it does not meet the 5 yr rule, will I owe tax on earnings and 10% penalty?

Distributions from a Roth 401(k) are a proportionate mix of basis and gains, so your RMD from the account will consist partly of gains unless the value of your Roth 401(k) has dropped below your contribution basis due to investment losses.  Because you have not met the 5-year period for qualified distributions from the Roth 401(k), the portion of the distribution consisting of gains will be taxable.

 

Because you are over age 59½, there is no statutory or regulatory limitation on doing a rollover from the Roth 401(k) to a Roth IRA except that the RMD for the year for the Roth 401(k) must be satisfied first.  It's unlikely that your Roth 401(k) plan agreement prohibits such rollovers, so you should then be able to roll the Roth 401(k) over to a Roth IRA.  Because your Roth 401(k) is not yet qualified, the contribution basis in the Roth 401(k) will become contribution basis in your Roth IRA and the gains will become gains in your Roth IRA.  If your Roth IRA is qualified (it's been at least 5 years since the beginning of the year for which you first made a Roth IRA contribution), any amount then distributed from the Roth IRA will be tax free.  You can continue to make Roth 401(k) contributions, but each time you do a rollover from the Roth 401(k) to the Roth IRA you'll need to satisfy the year's Roth 401(k) RMD first.

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5 Replies

I am 72 years old and must take RMDs from my solo Roth 401K that I opened last year. Since it does not meet the 5 yr rule, will I owe tax on earnings and 10% penalty?

@dmertz ?

dmertz
Level 15

I am 72 years old and must take RMDs from my solo Roth 401K that I opened last year. Since it does not meet the 5 yr rule, will I owe tax on earnings and 10% penalty?

Distributions from a Roth 401(k) are a proportionate mix of basis and gains, so your RMD from the account will consist partly of gains unless the value of your Roth 401(k) has dropped below your contribution basis due to investment losses.  Because you have not met the 5-year period for qualified distributions from the Roth 401(k), the portion of the distribution consisting of gains will be taxable.

 

Because you are over age 59½, there is no statutory or regulatory limitation on doing a rollover from the Roth 401(k) to a Roth IRA except that the RMD for the year for the Roth 401(k) must be satisfied first.  It's unlikely that your Roth 401(k) plan agreement prohibits such rollovers, so you should then be able to roll the Roth 401(k) over to a Roth IRA.  Because your Roth 401(k) is not yet qualified, the contribution basis in the Roth 401(k) will become contribution basis in your Roth IRA and the gains will become gains in your Roth IRA.  If your Roth IRA is qualified (it's been at least 5 years since the beginning of the year for which you first made a Roth IRA contribution), any amount then distributed from the Roth IRA will be tax free.  You can continue to make Roth 401(k) contributions, but each time you do a rollover from the Roth 401(k) to the Roth IRA you'll need to satisfy the year's Roth 401(k) RMD first.

I am 72 years old and must take RMDs from my solo Roth 401K that I opened last year. Since it does not meet the 5 yr rule, will I owe tax on earnings and 10% penalty?

@tgreszler 

Although @dmertz did not specifically mention it, I believe that Roth IRAs don't have an RMD.  So if you were to take your RMD this year from the 401(k), and then rollover the balance to a Roth IRA, you will avoid future RMDs on that money. 

I am 72 years old and must take RMDs from my solo Roth 401K that I opened last year. Since it does not meet the 5 yr rule, will I owe tax on earnings and 10% penalty?

Thanks. This is very helpful.

Tony

I am 72 years old and must take RMDs from my solo Roth 401K that I opened last year. Since it does not meet the 5 yr rule, will I owe tax on earnings and 10% penalty?

OK. Thanks. This seems like the best strategy.

Tony

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