Roth 401(k) Rollover to Roth IRA

[Guest NeophiteTPA]

A participant who is age 60 makes Roth 401(k) contributions during 2006 .

During 2006, he does a direct rollover of half of his Roth 401(k) account into a Roth IRA. (His plan allows in-service withdrawals.)

This distribution would be composed of both contributions and earnings, correct?

The distribution would be considered a non-qualified distribution since it had not been five years from 1/1 of the first deposit year, even though the age requirement was satisfied.

Question: We normally think of a direct rollover from a 401(k) plan as not being subject to tax. Is any part of this distribution taxable? Will tax be due on the interest and earnings piece of the rollover distribution since it is a non-qualified distribution? Would the answer change if the participant were under age 59 1/2?

A participant might choose to do this in order to get the 5-year non-exclusion period for the Roth IRA started as early as possible.

Thank you for your help in thinking this through.

[WDIK]

I think that in the case of a direct rollover of a non-qualified Roth 401(k) distribution a notice is provided to the Roth IRA specifying what portion of the distribution represents the participant's basis and the year of the participant's first Roth contribution to the plan.

[Guest Noodle]

I think that in the case of a direct rollover of a non-qualified Roth 401(k) distribution a notice is provided to the Roth IRA specifying what portion of the distribution represents the participant's basis and the year of the participant's first Roth contribution to the plan.

Why would they need to communicate the Roth start date? I was under the impression that the start date would carry over if the rollover was being performed to a Roth 401(k), but that if it was being deposited into a Roth IRA the five-year holding period would start over if no previous contributions had been made to the IRA, or would use the start date for the IRA if contributions had been made. Am I missing something?

- Noodle

Edit: From the January 26, 2006 proposed reg's:

"The IRS and Treasury Department do not believe that the Code permits this interaction between the two 5-year rules. . . . Thus, in the case of a rollover of a distribution from a designated Roth account maintained under a section 401(k) or 403(b) plan to a Roth IRA, the period that the rolled-over funds were in the designated Roth account does not count towards the 5-taxable-year period for determining qualified distributions from the Roth IRA."

[WDIK]

Sorry, Noodle, I think that you are right that that only applies for a rollover to another plan, not IRA.

§1.402A-2 Reporting and recordkeeping requirements with respect to designated Roth accounts.

Q-2. In the case of an eligible rollover distribution from a designated Roth account, what additional information must be provided with respect to such distribution?

A-2. (a) Pursuant to section 6047(f), if an amount is distributed from a designated Roth account, the plan administrator or other responsible party with respect to the plan must provide a statement as described below in the following situations--

(1) In the case of a direct rollover of a distribution from a designated Roth account under a plan to a designated Roth account under another plan, the plan administrator or other responsible party must provide to the plan administrator or responsible party of the recipient plan either a statement indicating the first year of the 5 -taxable-year period described in A-1 of this section and the portion of the distribution that is attributable to investment in the contract under section 72, or a statement that the distribution is a qualified distribution.

(emphasis added)

[Kevin C]

Try proposed §1.402A-1 Q&A 5. I think it addresses the original question.

Q-5. How do the taxation rules apply to a distribution from a designated Roth account that is rolled over?

A-5. (a) An eligible rollover distribution from a designated Roth account is permitted to be rolled over into another designated Roth account or a Roth IRA, and the amount rolled over is not currently includable in gross income. In accordance with section 402©(2), to the extent that a portion of a distribution from a plan qualified under section 401(a) is not includible in income (determined without regard to the rollover), if that portion of the distribution is to be rolled over into a designated Roth account, the rollover must be accomplished through a direct rollover of the entire distribution (i.e., a 60 day rollover to another designated Roth account is not available for this portion of the distribution) and can only be made to another plan qualified under section 401(a) which agrees to separately account for the amount not includible in income (i.e., it cannot be rolled over into a section 403(b) plan). See § 1.403(b)-7(a) for the corresponding rule applicable to section 403(b) plans. If a distribution from a designated Roth account is instead made to the employee, the employee would still be able to roll over the entire amount (or any portion thereof) into a Roth IRA within the 60-day period described in section 402©(3).

(b) In the case of an eligible rollover distribution from a designated Roth account that is not a qualified distribution, if the entire amount of the distribution is not rolled over, the part that is rolled over is deemed to consist first of the portion of the distribution that is attributable to income under section 72(e)(8).

© If an employee receives a distribution from a designated Roth account, the portion of the distribution that would be includible in gross income is permitted to be rolled over into a designated Roth account under another plan. In such a case, §1.402A-2, A-3, provides for additional reporting by the recipient plan. In addition, the employee's period of participation under the distributing plan is not carried over to the recipient plan for purposes of satisfying the 5-taxable-year period of participation requirement under the recipient plan.

(d) The following example illustrates the application of this A-5:

Example. Employee B receives a $14,000 eligible rollover distribution that is not a qualified distribution from B's designated Roth account, consisting of $11,000 of investment in the contract and $3,000 of income. Within 60 days of receipt, Employee B rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is deemed to consist of $3,000 of income and $4,000 of investment in the contract. Because the only portion of the distribution that could be includible in gross income (the income) is rolled over, none of the distribution is includible in Employee B's gross income.

(e) This A-5 applies for taxable years beginning on or after January 1, 2006.

[Bird]

Sorry, my earlier post above was flat wrong and I deleted it to avoid further confusion with later readers.