401k to Roth IRA Conversion over 60- 5 year rule?

[Tracer-x]

I have seen a couple conflicting answers to this.

Assume

I am 60.

I convert part of  a regular 401k to a Roth IRA.

I have other Roth IRAs from many years ago.

Can I access the rolled over amount almost immediately?  How about any earnings?

Or do I have to wait 5 years for one both ( and if I don’t wait, what happens? Tax? Penalty?).

 I have read and seen many conflicting answers on this, so hope to be pointed to the IRS doc that confirms 

[KarriC]

You CAN access the rolled over amount immediately, but you will also have penalties if the amount you are withdrawing hasn't been held for the required amount of time to be a qualified distribution. If you convert part of your 401(k) to a ROTH IRA, you're still under the 5 year rule since the funds are "new".

As far as the earnings go, when you withdraw funds you can't "choose" which part of the funds you are withdrawing (contribution v. earnings). The converted amount will contain both contribution and earnings.

The amount you are converting will produce a taxable event in the year you are converting to a ROTH because your 401(k) funds were pre-tax. So you'll have to pay tax on the amount you are converting.  

If you take a distribution from the ROTH before the end of the 5 year period, it's called a nonqualified distribution. You have to include the earnings part of your conversion in your gross income, but the basis is not included.

Following is the IRS guidance on this subject.
IRS Retirement Plan FAQs on Designated ROTH Accounts 

IRS Rollovers of retirement plan and IRA distributions

The thing to remember is, it's your money, if you need it, it's there for you. You will pay a bit more, tax-wise, but if you need it, you can use it. 

[Tracer-x]

Thanks so much!

just to be sure I’m following-

if I rollover 100k from my 401k to a Roth, I of course pay tax on the $100k—- then, if I want to avoid any penalties… I have to leave the 100k AND any earnings alone for 5 years.  

If , say in 3 years the 100k had grown to $125k.   If I take out $50k,….. does that mean I have to include $25,000 in my gross income that year?    

[KarriC]

Under the present tax law, and assuming you are over 59.5 years old, nonqualified distributions are subject to your standard income tax rate. That, of course, depends on your overall taxable income.

If you are not yet 59.5, then an additional 10% penalty would also apply.

[Tracer-x]

Thanks

i am assuming I’m 60.

bit of the $100k turned into $125k, and I took out $50k, I still am unclear what I pay tax on.  If it is the entire $50k, then I’m being double taxed, which seems weird.  If I pay tax on $25k (earnings), that sounds reasonable. 

[Paul_W1]

Hi Tracer-X

Following up hoping to provide more clarification about the distribution from a 401k to ROTH.  Based upon what you given, and the timeline, 50K will be taxable.  It will be like double taxed because you were never taxed on the original 401k of $100,000.  Then you have the conversion of which ROTH grew over 3 years to $125,000.  Yes, $25,000 is in ROTH earnings.  Based upon your situation, you indicated that you withdraw prior to the 5 year rule.  Please be mindful of the following two (BOTH) conditions must be met.

1. Age 59 1/2

AND

2. 5 years holding of the account

Hope this helps to clarify.  Thank you for participating in the event.  We greatly appreciate your question.

[Tracer-x]

Thanks so much!

can you please point me to the irs document which says that so I have it at the ready?  

thanks so much for your help. 

[Paul_W1]

Hi Tracer-X

Here is the IRS Pub 590 that discusses retirement plans.  Look specifically at the ROTH sections.

https://www.irs.gov/pub/irs-pdf/p590a.pdf

[Tracer-x]

 I read 590 a, which led to 590b.   I read all through it and couldn’t find (or couldn’t understand) it enough to confirm.  

the problem I have is 2 very trustworthy tax experts are saying 2 different things.   That is why I’m trying to find it from the IRS in black and white.  …. The exact verbiage that confirms if a converted Roth distribution is taken before 5 years is up  and the person is 60….they owe something or not. 

I tried the IRS automated calculator.  This seems to say I would owe tax for earnings but not the basis. But I’m not sure I answered the bot correctly 

 https://www.irs.gov/help/ita/is-the-distribution-from-my-roth-account-taxable

[KarriC]

I hope this is exactly what you're looking for. The following was copied and pasted from the IRS Retirement plans FAQs on designated Roth accounts, link included here: IRS Retirement Plan FAQs on Designated ROTH Accounts 

What happens if I take a distribution from my designated Roth account before the end of the 5-taxable-year period?

If you take a distribution from your designated Roth account before the end of the 5-taxable-year period, it is a nonqualified distribution. You must include the earnings portion of the nonqualified distribution in gross income. However, the basis (or contributions) portion of the nonqualified distribution is not included in gross income. The basis portion of the distribution is determined by multiplying the amount of the nonqualified distribution by the ratio of designated Roth contributions to the total designated Roth account balance. For example, if a nonqualified distribution of $5,000 is made from your designated Roth account when the account consists of $9,400 of designated Roth contributions and $600 of earnings, the distribution consists of $4,700 of designated Roth contributions (that are not includible in your gross income) and $300 of earnings (that are includible in your gross income).

Since I make designated Roth contributions from after-tax income, can I make tax-free withdrawals from my designated Roth account at any time?

No, the same restrictions on withdrawals that apply to pre-tax elective contributions also apply to designated Roth contributions. If your plan permits distributions from accounts because of hardship, you may choose to receive a hardship distribution from your designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the earnings portion will be included in gross income unless you have had the designated Roth account for 5 years and are either disabled or over age 59 ½.

Please remember that since you are rolling from a 401(k) to a Roth, you will need to pay tax on the amount that is rolled over since you were never taxed on the amount you contributed to the 401(k).
This is NOT double taxation, the amount you contributed to the 401(k) made your taxable income LESS in the year you contributed since it lowered your taxable income.
Roth contributions are after tax, meaning you paid income tax on the amount you contributed.
401(k) contributions are pre tax, meaning you did NOT pay income tax on the amount you contributed.

I can assure you that TurboTax will handle the taxation of the withdrawal correctly. Just be sure to read all the questions you're asked carefully before answering. If you're using Desktop, use step-by-step mode, NOT forms. Step-by-step mode will help you with situations you aren't fully versed on to calculate the proper tax.

[Tracer-x]

Ok. Thanks.  A previous person had said I would be taxed on everything.  I definitely understand. I would pay the taxes when I convert from the 401(k) to the Roth.   It’s a long irs document, but I think this is saying it would tax just on the earnings if I took out more than what I first put in if the Roth hadn’t been in there for five years.  (If $100k went in, and 1 year later it was worth $120k- and then I took out $110k….  I guess I pay tax on $10k).   Though the article seems to be about ‘designated Roth Ira’s’- which aren’t the same as converted Roth IRAs which have their own 5 yr requirement.   So I’m still not sure I’ve got the irs info I need 

While I am trusting Turbo Tax handle it right, though most tax experts seem to have differing understandings from what I’ve been able to figure out. So I don’t really know what is “right“.   Which is why I’m trying to get the information directly from the IRS. I’m just hoping I can answer the questions properly with TurboTax. Because some of the verbiage gets very tricky. For example, “designated Roth“ vs converted Roth

[KarriC]

A designated Roth account is a separate  account in a 401(k), or governmental 403(b) plan to which designated Roth contributions are made. Designated Roth contributions aren't excluded from gross income and are taxed. 

A Roth conversion happens when you move assets from a traditional, SEP or SIMPLE IRA, 401(k), or 457(b) and put them in a Roth IRA. When you convert, you'll include the converted amount as ordinary income.

[Tracer-x]

Yes, I see.  My main question is….the referenced irs article seemed to reference designated Roth IRAs, where I am asking about converted Roth IRAs….so wasn't sure if the article was answering my question.  

[john989]

I’m having the same question about converted Roth IRA, and I didn’t get the answer by reading this whole thread. After I did some research, and realized that the answer is actually pretty clear. The money or contributions either converted from 401k or directly from your paychecks, had been already taxed when you put them into your RothIRA. So, those portions are not taxable since you’re 59.5. If they are taxed, you paid double tax as you already know that, which does not make any sense.

To avoid 5 years rule, you better open a new RothIRA for receiving converted contributions, this way it does not screw up your old existing RothIRA which has already met 5 years rule and you can withdraw money from it freely.

[Mike9241]

The first Roth IRA contribution starts the 5-year rule. It's a once-in-a-lifetime satisfaction of the holding period rules for all of the taxpayer's Roth IRAs. A contribution to a different Roth account will not start a new holding period. REG 1.408A-6