Roth 401k rollover rules?

Roth 401k rollover rules?

I have been contributing to my Roth 401k for the last year and am now considering looking for a new job so that I can make even more money and contribute even more to my retirement.  When I leave my current employer I plan on rolling over both my Traditional 401k balance to a Traditional IRA and my Roth 401k balance to a Roth IRA.

Now seeing as how a Roth 401k is so new and so few companies have it I’m guessing I’m probably one of the leading pioneers here.  My question revolves around how my Roth 401k rollover will be viewed by Uncle Sam.  Seeing as how in a Roth IRA you can withdraw your contributions without penalty, when I roll over my Roth 401k will that just be considered one big contribution OR will they take them time to sort out investment gains from contributions in my Roth 401k and somehow relay this onto my new Roth IRA custodian?

I only have maybe $1500 in investment gains this year so its not a huge deal, but was wondering if this may be some sort of loophole for the Retire early crowd having access to more of your Roth IRA balance before age 59.5.

  • EMF

    Go to http://www.irs.gov and type in some appropriate terms in their search box. I did that and came up with
    http://www.irs.gov/retirement/article/0,,id=156204,00.html That article states that you can rollover your Roth 401k to a Roth IRA.

    Or depending on the rules of your plan, you might be able to leave your money in the plan if you have a sufficiently high balance. Looking at your net worth statement I’d guess that you probably have that option. If it’s a well managed plan with low fees, I’d consider that if you have the option.

    As far as pulling money out before the age of 59.5, google up “retire early 72t”. IIRC, you can start distributions but they have to be calculated to last over your expected lifetime, and once started can’t be turned off except according to rule 72(t).
    Also a 401k account is available without penalty if you are employed in the associated job until after reaching the age of 55.

    I’m jealous of you. My company has an excellent Traditional 401k, but I wish they’d add an option for the Roth 401k.

  • My Financial Journey

    Thanks for the info – yeah I know I can roll over to a Roth IRA, was just curious as to how the rollover treats contributions vs gains, but since then the research I have done lends me to think that when you do the rollover they keep track of which part of the funds were your actual contributions and which were investment gains.

    The reason I was so curious about this is because you can withdraw your contributions from your Roth IRA at anytime without penalty. Not that I would ever do this (at least not until I’m ready to retire), but was just curious if you could work this system somehow on the rollover to get the entire Roth 401k amount considered a contribution once rolled over to Roth IRA – appears this is not the case.

    As far as the Roth 401k – yes its a great option especially for someone like me who is in one of the lower tax brackets, would much rather pony up the taxes now when they are cheap, unfortunately very few companies offer the Roth 401k at this point, only reason my company does is because I started pestering HR 6 months before the Roth 401k came out.

    Thanks for the great info!

  • John Payne

    The way I read the article it says you cannot roll your previous pre tax 401 contributions into a roth 401k….

    Comparing designated Roth contributions with Roth IRA contributions: While designated Roth contributions bear some similarity to Roth IRA contributions (Code section 408A), there are several differences between the types of contributions, including:

    Designated Roth contributions are not limited by income.
    Pre-tax elective contributions under a 401(k) or 403(b) plan may not be converted to a designated Roth account.
    Designated Roth contributions do not have the specific ordering rules for distributions that apply to Roth IRAs

  • Jim Wright

    IRS notice 2008-30 published in IRB08-12 discusses the rules regarding rollovers of pre-tax 401(k) contributions into either a traditional IRA or a Roth IRA. Rollover into a Roth IRA is considered a conversion and is treated identically to converting a traditional IRA to a Roth (with all of the ridiculous and convoluted conditions). I didn’t look too closely at the ordering rules but I believe you will be able to recover your Roth 401(k) contribs tax and penalty free. BE SURE to establish a Roth IRA regardless of your 401(k) (et. al.) situation since the 5 year period starts at the earliest date.

  • Adam

    dude, listen up. Here’s what you should do.

    Convert your Traditional IRA to a Roth IRA if you are eligible (must be making 100,000 dollars or less) or wait until 2010 when their is no limit for conversions.

    If your ineligible income-wise for an Roth IRA than well that sucks, but if you are definetly convert.

    You then should rollover your Roth 401k into your Roth IRA by method of trustee to trustee transfer.

    You wont get any penalty on it if you do it this way and fill out a special form. And all of your dough will go to your Roth IRA tax and penalty free and will be viewed as a contribution. Your 401k that you open at your new employer will have another 5 year holding limit before withdrawals.

    Good luck

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