If you rollover your funds from an employer's Roth 401k to Roth IRA, would the contribution you made count towards your total contributions you're allowed to withdraw?

[hassanef55]

If I contributed $15,000 to a Roth 401k and rolled to a Roth IRA, can I withdraw $15,000 without penalties and tax?

[Opus 17]

If done correctly, a rollover does not count as a contribution. Ideally, you want to do a direct transfer between the two plan trustees. If you take a check from the 401(k), you must deposit it in the new plan within 60 days and you must tell them before you make the deposit that it is a rollover.

[hassanef55]

Yes, it is a direct transfer. I figured a Roth contribution to either Roth accounts means you're still able to withdraw what you contributed without tax or penalty.

[Opus 17]

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@hassanef55 wrote:

Yes, it is a direct transfer. I figured a Roth contribution to either Roth accounts means you're still able to withdraw what you contributed without tax or penalty.

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OK, I answered first on my phone and didn't understand the actual point of the question.

When you withdraw Roth IRA funds, you are required to withdraw contributions first, then rollovers and conversions, then earnings last.  This is per law, you can't change it if you want to.  Withdrawals of a rollover amount are not subject to income tax (since the source was after-tax money), but withdrawals of a rollover are subject to a 10% tax for early withdrawal if you are under age 59-1/2 and if the rollover was less than 5 tax years ago.   The IRS does not count the contribution part of the rollover separate from the earnings part of the rollover, it is all one rollover and subject to the same rules.   You will pay a 10% penalty if you withdraw any part of the rollover in the first 5 years after the rollover, if you are under age 59-1/2.  If you make the rollover any time in 2022, the fifth year is 2026 (counting 2022 as the first year) so any withdrawal made during 2027 or later would be exempt from the 10% penalty.

Your Roth IRA has another 5 year rule: any withdrawal of earnings is subject to income tax and a 10% penalty if the account has been open less than 5 years and you are under age 59-1/2, and such a withdrawal is subject to income tax (but not the 10% penalty) even if you are over age 59-1/2.  This 5 year rule is satisfied when you open any Roth IRA and have it for 5 years, even if the specific account is less than 5 years old.  So if this is your first Roth IRA, you will pay a 10% penalty if you withdraw any amount of the rollover before 2027, and you will pay income tax on any part of the earnings (that are earned after the rollover) that you withdraw before 2027, even if you are over age 59-1/2.

So the simple answer is no, you can't withdraw the money without taxes and penalty.  You have to look at your age and 2 different 5 year rules.  If you leave the money in the 401(k), you can withdraw the contributions without penalty, and you pay income tax and a 10% penalty if you withdraw the earnings and you are under age 55 or age 59-1/2, depending on when you separate from service.  (Also note, you usually can't withdraw or rollover any funds from a 401(k) as long as you are still employed with the plan sponsor.)

[hassanef55]

Thank you for clarifying. Make sense now.

[dmertz · Accepted solution]

Opus 17's reply is incorrect.  If your Roth 401(k) is not yet qualified, when rolled over to the Roth IRA the amount of your contributions to the Roth 401(k) become contribution basis in the Roth IRA.  If your Roth 401(k) is qualified at the time of the distribution from the Roth 401(k), the entire amount of the distribution rolled over from the Roth 401(k) to the Roth IRA becomes contribution basis in the Roth IRA.  Your Roth 401(k) is qualified if at the time of the distribution from the Roth 401(k) you had reached age 59½ and it has been 5 years since the beginning of the year that you first contributed to the Roth 401(k).

The Roth 401(k)'s 5-year qualification clock does not transfer to the Roth IRA.  Your 5-year qualification clock for your Roth IRAs starts with the first contribution, rollover or conversion deposited into any of your Roth IRAs.

If you did any In-plan Roth Rollovers from the traditional account in the 401(k) to the Roth account in the 401(k), when rolled over to a Roth IRA the amounts of any IRRs become conversion basis in the Roth IRA and retain their 5-year conversion clock (different from the 5-year qualification clock).

Distributions from your Roth IRA follow Roth IRA ordering rules.  When distributed from the Roth IRA, your contribution basis comes out first tax and penalty free.  If your 5-year clock for Roth IRAs has been satisfied, any regular distribution from your Roth IRAs is tax and penalty free.

[hassanef55 · Accepted solution]

Thank you so much for clarifying. Makes sense.

[Opus 17]

I defer to @dmertz  in all things. I’m sorry that I did not clarify that over age 59 1/2, the rules are very different.  The treatment of the rollover before age 59 1/2 as separating contributions from earnings makes logical sense, but I could not find it documented anywhere in publication 590Aor 590B, and I still don’t understand where that rule comes from.

[dmertz]

CFR 1.408A-10 Q&A-3:  https://www.law.cornell.edu/cfr/text/26/1.408A-10