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Five year period


joel
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Unfortunately it appears the IRS treats the 5-year holding period of Roth-401(k) as separate from the ROTH-IRA holding period. Seems like you should get credit back to the year of original ROTH 401(k) deposit if you rollover to ROTH-IRA but unfortunately that's not how the rules are written. Maybe there will be some future correction to this but doesn't seem like an issue that is at the forefront of congress attention.

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Set up a Roth IRA this year.  Worst case, do a minimal (based on the IRA provider requirements) Roth conversion. That will start your 5-year clock.  After the 5 year period is acheived, then you can roll over to the Roth IRA.  That may not be very appealing, for example, if you are trying to avoid required distributions relating to the 401(k) plan, but you reported that you are age 62.  However, it keeps your ripened Roth money available, subject to the distribution options of the 401(k) plan, during the less-than-5-year wait on the conversion IRA.

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I agree with QDROphile, but perhaps the rule can be stated more explicitly and in greater detail: When you roll from a Roth 401(k) account to a Roth IRA, contrary to what you might have expected, at least for the portion of the Roth IRA consisting of the rollover, there is no carry over or "tacking" of the portion of the 5-year holding period already satisfied in the Roth 401(k) to the Roth IRA. Rather, any new Roth IRA, even one that receives a rollover from a Roth 401(k), starts at zero years on its own 5-year holding period, and the money coming from the Roth 401(k) generally loses its own holding period history and takes on the holding period history of the Roth IRA you're rolling to. Depending on when the Roth IRA was established relative to the first dollars into the Roth 401(k), could help you or hurt you.

So if you roll from a Roth 401(k) account to a Roth IRA that was already up and running for a while (even if much smaller than the 401(k) account you are rolling in, or even minimal), then the Roth 401(k) money will take on the holding period of the Roth IRA, even if more of the 5-year period was satisfied in the Roth IRA than in the Roth 401(k) account. Conversely, if you roll funds from a Roth 401(k) that had satisfied the holding period to a brand new Roth IRA, you have to complete a brand new 5-year holding period under the Roth IRA in order for distributions from the IRA to have the Roth benefit of being not includible in gross income. (Of course the portion of any distribution from the Roth IRA that consisted of the nondeductible contributions to the Roth 401(k) would not be includible in your gross income, since would be a recovery of after-tax basis.)

But note that there is a "twist" if, as you say is your case, you already satisfied the 5-year holding period in the Roth 401(k) account. In that case, because the distribution from the Roth 401(k) account was 100% nontaxable when you rolled it over, it's all after-tax "basis" in the Roth IRA, and only the post-rollover earnings on that amount would be subject to tax if you withdrew from the Roth IRA before the Roth IRA had itself satisfied the 5-year holding period.

See Treas. Reg. 1.408A-10, Q&A-4, Examples 1, 2, and 3.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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Which would be a rational way to approach the issues, but I have been unable to find any authority for that outcome.

Thinking outside of  published authority, I can understand that the “age” of the Roth IRA controls rather than the age of the incoming rollover. It is much less administrative burden on the IRA provider to measure only from the inception of the IRA, which is within the records of the provider. If outside money determines the time compliance of the funds in the IRA, the IRA provider is put in a more difficult position to understand and verify the age of the outside money.

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I respectfully disagree with ERISA-Atty. Suppose the individual has never had a Roth IRA, and the designated Roth account in the 401(k) Plan (which had satisfied the 5-year period while in the 401(k)) is rolled to a new Roth IRA.  The 5-year period begins when the Roth IRA is established in this situation. See 1.408A-10, Q&A-4. It gives examples of how all this works.

Sorry - I hadn't read Luke's post - he already provided the references!

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