The ERISA consultants at the Retirement Learning Center Resource regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in Pennsylvania is representative of a common inquiry regarding Designated Roth contributions in a 401(k) plan. The advisor asked:
“My Client participates in a 401(k) plan, has a Designated Roth account, and wants to roll over the Designated Roth account to a Roth IRA. Can she count the time in the 401(k) plan toward the 5-year waiting period for the Roth IRA needed for taking qualified distributions?”
Highlights of Discussion
The short answer is, surprisingly, “No.” If your client rolls over her 401(k) plan Designated Roth account assets to a Roth IRA, the time spent in the Designated Roth account will not carry over to the Roth IRA (IRS Treasury Regulation § 1.408A–10, Q&A 4).
This means that if your client established her first Roth IRA with the rollover of Designated Roth account assets, the 5-year period for determining qualified distributions from the Roth IRA would begin that year. In essence, the 5-year period for determining qualified distributions in the 401(k) plan is determined separately from the 5-year period for determining qualified distributions in the Roth IRA.
It’s another one of those “earlier of” scenarios for the Roth IRA and the 5-year period (§1.408A–6, Q&A 2). The 5-year period for the Roth IRA begins with the earlier of the taxable year in which either:
- the first Roth IRA contribution (or conversion) is made to any Roth IRA owned by the individual, or
- a rollover contribution of a Designated Roth account is made to a Roth IRA.
Conclusion
The 5-year period for determining qualified distributions from a 401(k) plan Designated Roth account is determined separately from the 5-year period for determining qualified distributions in a Roth IRA. For that reason, it may be advantageous for investors to make a Roth IRA contribution sooner rather than later in order to set the 5-year clock in motion in the Roth IRA.
Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Consumers should consult with their tax advisor or attorney regarding their specific situation.
©2022, Retirement Learning Center, LLC. Used with permission.
