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I left my job with money in a Roth 401k, can I roll it to a Roth IRA? I only had the Roth 401k for 3 years."?

I am 35 years old & have a Roth IRA from 2003. Can I roll it into that Roth IRA or should I set up a separate one? The IRS website was confusing as it said a qualifying event is only death, disability, or age 59 1/2. It also mentioned if I roll it into a new Roth IRA I will start the 5 year holding period again (this is not a big deal as I am only 35). My wife has a 403(b) & they are offering a Roth feature, we do not have a lot of extra money with 2 kids but should we open a Roth IRA on the outside for her to roll this money into when she retires (I know tax law will change but if she were retiring today at 60 and she rolled this money into a Roth IRA would it require a new 5 year holding period)? Again the IRS site is not very user friendly!

Thansk

Nov 14, 2014 by Peter from Hamburg, NY in  |  Flag
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Peter C. Karp Level 20

Peter,

Since we know very little about the rest of your financial history or needs I am going to provide some general answers to questions.

First of all, start your clock…..There are two 5 year clocks. One is in the IRA world. The other is in the 401(k) world.

If you already have a Roth IRA, your clock has already started. The rollover of more Roth from a Roth 401(k) account does not re-start the clock. It is just more money added to your account. If you do not have any other Roth IRA, then the clock starts when the Roth IRA receives the rollover. Consider rolling over a small amount of the 401(k) Roth into the Roth IRA to get started on that clock.

Second, once in Roth IRA Land, you stay. If you roll your 401(k) Roth over to a Roth IRA, you cannot roll it back into a 401(k) Plan. You also loose the start of the clock in the qualified plans. If you think you might want to transfer your Roth to another plan and keep the clock, wait until you can roll it to the plan of your next employer who has a Roth feature. Check with your current (or next) employer to see if they have a Roth feature and if they will accept the rollover. If yes, then you keep your three year clock. This clock will continue working toward 5; you do not have to make added contributions, it will age on its own.

Third, don't Lose Track. Make sure you don't lose contact with your old employer or that plan. You would be staggered by the amount of unclaimed 401(k) Plan money. Address notification changes may be a pain, but are a lot easier than the regret of losing track of your money.

Fourth, get some personal tax advice from a CPA who will look into your personal situation. Relying on Google searches and random IRS pages is like self-diagnosing that bump. It may be nothing, it might go away, but it might also hurt you.

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Comment   |  Flag   |  Dec 03, 2014 from San Francisco, CA

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Peter, at the risk of confusing you, I would like to offer some clarification. First, definitions: Roth plans are "pay me now". You get no initial tax benefit- you pay the tax on the income- but all the growth, and qualified withdrawals, will be tax-free. Traditional plans are "pay me later": you are allowed to deduct the deferred amount from your income now, but later on when you withdraw it, it becomes ordinary income. Finally, that Roth 5-year rule applies only to the earnings your investments have earned-- not to the amount that you originally invested (your "basis").

So to answer your first question, yes, you can roll your Roth over from the company plan to your individual plan. The advantage will be fewer accounts to try to keep track of and manage. There could be a disadvantage too: some of the expenses of operating the company plan are paid for by the company, thus potentially reducing the overall level of fees that you pay. An advisor could assist you with this decision. The 5-year rule will be irrelevant since the account has already been open longer than that. The nice thing about the Roth IRA is that you are able to withdraw an amount equal to your "basis"- how much you originally contributed to the plan- penalty free, at any time, regardless of whether the 5 year rule has been satisfied. Of course we don't recommend this, but if it was either that or lose your house for example, you have it as an option.

I always like to recommend a combination of Roth and Traditional. If you will be using the Roth option at your job (when you get back to work), I would be quite comfortable with your wife using the Traditional 403b. This would also give you a little more tax savings right now, since the trad deferrals would reduce your income. Check with a tax advisor on this, however, since you may be paying little or no taxes anyway, in which case definitely use the Roth option. (In the future, if you get into higher income levels, she can switch.) Don't be concerned about opening a Roth IRA for your wife now; even with the 5 year rule, there is still all of her "basis" to be withdrawn before that becomes an issue.

Roth plans are not subject to Required Minimum Distributions because you have already paid the tax on the money that was deferred into the plan. The RMD is just Uncle Sam's way of saying, "OK, you're over age 70, it's time to start paying the taxes!" Since there will be no further tax paid on Roth plans, you don't have to withdraw the money.

Comment   |  Flag   |  Nov 19, 2014 from Sayre, PA

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  1. The website is talking about a "distribution"...in IRA terms that means you take the money out from under the protection of IRA status...i.e. get a check. A rollover (or direct transfer) from one designated IRA to another is not a distribution so what you were reading about qualifying events does not apply.
  2. When a Roth is opened, the initial contribution starts the 5 year clock ticking so you might not want to open a new account. On the other hand, if you rollover those funds into a Roth IRA that is designated as a ROLLOVER IRA (not just a regular Roth IRA), then you do have the ability to perhaps someday, move that money back into a new employer's 401K plan, provided the new employer plan permits it. But if you roll it over to your existing Roth, you will lose that possibility for the future.
  3. I would advise your wife to stick with the 403b Roth because of matching and higher contribution limits even though there would be a new 5 year holding period requirement on rollover to an individual Roth. Remember that you can withdraw original contributions anytime without owing tax so on rollover, it would only be the earnings portion that would be subject to a new 5 year waiting period.
Comment   |  Flag   |  Nov 14, 2014 from Fort Washington, PA

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Tunc Tanin Level 10

I would add this. Don't roll over your Roth 401k into a Roth IRA you already have open. When you do that 5 year period starts all over. I usually recommend a Roth IRA over a ROTH 401k because the ROTH 401k is subject to RMD's where as Roth IRA is not. If you roll over your Roth 401k into a ROth IRA after 5 years you can access the principal in this new Roth IRA. You may never need to do that but you are young. If you need the funds in an emergency, it is a good option to have. If you leave them in the Roth 401k you dont have this option

Comment   |  Flag   |  Nov 17, 2014 from Somerville, MA

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