Rollover from Roth 401(k) to Roth IRA a taxable event - True?
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Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Hello,
Just got off the phone with Vanguard and want to validate what they told me. They said that the guidance below is IRS policy and not related to my specific former employer plan.Unfortunately, they couldn't point me to a specific IRS publication.
I have both Roth and traditional funds in a former employer's 401(K). I was calling about the ability to roll-over just the Roth portion of those funds to a Roth IRA. They said that I could do this, but the earnings on my previous Roth contributions would be taxable. However, if I wait until 59.5 years of age, and keep everything in the 401(K) those earnings are no longer "in limbo" and are tax-free from that point on.
For example -
Traditional 401(K) contributions and earnings on those contributions: $300K
Roth 401(K) contributions: $100K
Earnings on Roth 401(K) contributions: $50K
According to Vanguard, the $150K could be transferred to a Roth IRA, but I would have to pay taxes on $50K for this privilege.
Is this correct? There doesn't seem to be any logic behind it -- but I realize that may be asking too much.
Thanks in advance.
Just got off the phone with Vanguard and want to validate what they told me. They said that the guidance below is IRS policy and not related to my specific former employer plan.Unfortunately, they couldn't point me to a specific IRS publication.
I have both Roth and traditional funds in a former employer's 401(K). I was calling about the ability to roll-over just the Roth portion of those funds to a Roth IRA. They said that I could do this, but the earnings on my previous Roth contributions would be taxable. However, if I wait until 59.5 years of age, and keep everything in the 401(K) those earnings are no longer "in limbo" and are tax-free from that point on.
For example -
Traditional 401(K) contributions and earnings on those contributions: $300K
Roth 401(K) contributions: $100K
Earnings on Roth 401(K) contributions: $50K
According to Vanguard, the $150K could be transferred to a Roth IRA, but I would have to pay taxes on $50K for this privilege.
Is this correct? There doesn't seem to be any logic behind it -- but I realize that may be asking too much.
Thanks in advance.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
And as best I can tell from this article (https://www.fidelity.com/viewpoints/ret ... r-guidance), it appears that Vanguard may be confusing earnings on after-tax contributions (which would be taxed) with earnings on Roth 401(K) contributions (which wouldn't be). But would love some additional confirmation.
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
As a general rule Vanguard does not advise on tax issues, and this is why.
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
In my experience, 5 years ago, Vanguard reps don't know the difference between Roth and after-tax.
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
I called Vanguard about this issue just the other day, and I was told that the rollover (and make very clear that your 401(k) contributions were Roth, not after-tax) was not a taxable event.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
This information is incorrect. A rollover from Roth 401k to Roth IRA is not taxable.CashConfessions wrote: ↑Wed Dec 01, 2021 9:00 am Hello,
Just got off the phone with Vanguard and want to validate what they told me. They said that the guidance below is IRS policy and not related to my specific former employer plan.Unfortunately, they couldn't point me to a specific IRS publication.
I have both Roth and traditional funds in a former employer's 401(K). I was calling about the ability to roll-over just the Roth portion of those funds to a Roth IRA. They said that I could do this, but the earnings on my previous Roth contributions would be taxable. However, if I wait until 59.5 years of age, and keep everything in the 401(K) those earnings are no longer "in limbo" and are tax-free from that point on.
For example -
Traditional 401(K) contributions and earnings on those contributions: $300K
Roth 401(K) contributions: $100K
Earnings on Roth 401(K) contributions: $50K
According to Vanguard, the $150K could be transferred to a Roth IRA, but I would have to pay taxes on $50K for this privilege.
Is this correct? There doesn't seem to be any logic behind it -- but I realize that may be asking too much.
Thanks in advance.
If you were to take a distribution of the money, instead of rolling it to Roth IRA, the earnings would be taxable and have a penalty as well.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Thanks all. The same perspective was provided by a CFP provided by work as well. Now I have to figure out how to tell them “yes I want to roll it over and no I don’t want you to deduct taxes from it.”
Not to start another is Vanguard good or bad thread, but it’s frustrating when they’re wrong about basic facts (not hypotheticals, what-ifs or things that are better left to tax experts).
Thanks again.
Not to start another is Vanguard good or bad thread, but it’s frustrating when they’re wrong about basic facts (not hypotheticals, what-ifs or things that are better left to tax experts).
Thanks again.
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
The problem seems to be the knowledge base of the people answering the phones, not the people doing the actual rollover. Just fill out the paperwork and expect it to go well...because it probably will.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
CashCashConfessions wrote: ↑Wed Dec 01, 2021 2:14 pm Thanks all. The same perspective was provided by a CFP provided by work as well. Now I have to figure out how to tell them “yes I want to roll it over and no I don’t want you to deduct taxes from it.”
Not to start another is Vanguard good or bad thread, but it’s frustrating when they’re wrong about basic facts (not hypotheticals, what-ifs or things that are better left to tax experts).
Thanks again.
I rollover my Pretax 457 and Roth 457 from NYSDCP to Vanguard on August 2021, as far as I can tell the 1.7 million is not a taxable event.
I spoke to a transfer specialist at Vanguard who walked me through the process.
Here is my story in case you desire to read: viewtopic.php?f=1&t=324944
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Who are "them" because taxes would normally be withheld by the sending institution and the 401k administrators will be familiar with this and get it right.CashConfessions wrote: ↑Wed Dec 01, 2021 2:14 pm Thanks all. The same perspective was provided by a CFP provided by work as well. Now I have to figure out how to tell them “yes I want to roll it over and no I don’t want you to deduct taxes from it."
Thanks again.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Sorry - in this case, the "them" is Vanguard as the administrator of the plan. Looks like the consensus from above is that the Vanguard staff who do it on the back end are more knowledgeable than the folks who answer the phone... but it is a bit nerve-wracking.placeholder wrote: ↑Wed Dec 01, 2021 5:47 pmWho are "them" because taxes would normally be withheld by the sending institution and the 401k administrators will be familiar with this and get it right.CashConfessions wrote: ↑Wed Dec 01, 2021 2:14 pm Thanks all. The same perspective was provided by a CFP provided by work as well. Now I have to figure out how to tell them “yes I want to roll it over and no I don’t want you to deduct taxes from it."
Thanks again.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
A rollover is not a taxable event.CashConfessions wrote: ↑Wed Dec 01, 2021 6:30 pmSorry - in this case, the "them" is Vanguard as the administrator of the plan. Looks like the consensus from above is that the Vanguard staff who do it on the back end are more knowledgeable than the folks who answer the phone... but it is a bit nerve-wracking.placeholder wrote: ↑Wed Dec 01, 2021 5:47 pmWho are "them" because taxes would normally be withheld by the sending institution and the 401k administrators will be familiar with this and get it right.CashConfessions wrote: ↑Wed Dec 01, 2021 2:14 pm Thanks all. The same perspective was provided by a CFP provided by work as well. Now I have to figure out how to tell them “yes I want to roll it over and no I don’t want you to deduct taxes from it."
Thanks again.
A Roth Conversion of pretax account is a taxable event.
Was there a misunderstanding from either discussions?
If it is a recorded line, you could ask for a review.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Thanks - it was a recorded line, and I was very clear that this was a discussion on the earnings in a Roth 401(K). I submitted a message to Vanguard, and received the below reply -- all clearly copy/paste. I still believe that the first bolded portion below contradicts the second bolded portion; at the very least, it's poorly phrased, and instead of saying that the earnings are "pre-tax", it would be sufficient to say that the earnings would be subject to taxation if certain requirements are not met.retire2022 wrote: ↑Wed Dec 01, 2021 6:35 pm A rollover is not a taxable event.
A Roth Conversion of pretax account is a taxable event.
Was there a misunderstanding from either discussions?
If it is a recorded line, you could ask for a review.
Appreciate everyone's comments. The reply from Vanguard follows.
Your inquiry >>
A rollover of the earnings on Roth contributions is not a taxable event.
However, since the earnings are pre-tax money, the assets would be
considered taxable income if withdrawn if certain requirements are not met.
The Economic Growth and Tax Relief Reconciliation Act of 2001 contained an
Internal Revenue Code provision that allows for Roth 401(k) and 403(b)(7)
accounts. As a result, all 401(k) and 403(b)(7) plan sponsors may offer a
Roth deferral option to their plan participants. The Roth 401(k) and 403
(b)(7) feature allows participants to make after-tax contributions to their
accounts and take tax-exempt "qualified distributions/earnings” upon
retirement. The Roth option is not a mandatory feature, however, each plan
sponsor may decide whether it will offer such a feature to its plan
participants.
About the feature >>
401(k) and 403(b)(7) plans may offer a Roth contribution source within
their defined contribution plans. This option is similar to a Roth IRA:
* Employee contributions are on an after-tax basis only.
* Investments grow free from federal income tax.
* Assets in a Roth contribution source can be withdrawn free of federal
income tax if the participant has held them in the account for at least 5
years and is at least age 59 1/2 or in the event of death or disability.
These contributions enjoy the same tax advantages as individual Roth IRAs.
Namely, the contributions are made with after-tax dollars. However,
earnings will accumulate tax-free assuming certain distribution
requirements are met. Participants currently have the option of opening
their own Roth IRA, although some do not qualify due to income limits. Now
participants at all income levels can benefit from this feature, should
their plans elect to implement the optional provision.
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
You may not like the wording, but what they said is correct as far as I can see.
Your earnings are pre-tax and would be taxable if withdrawn (not rolled over).
I don't see any contradiction myself. If you do this rollover, just make sure that you are 59.5 or disabled AND the Roth IRA itself is at least 5 years old before you take out the earnings.
Are you familiar with how money comes out of Roth IRA? I mean the order in which the money comes out.
Your earnings are pre-tax and would be taxable if withdrawn (not rolled over).
I don't see any contradiction myself. If you do this rollover, just make sure that you are 59.5 or disabled AND the Roth IRA itself is at least 5 years old before you take out the earnings.
Are you familiar with how money comes out of Roth IRA? I mean the order in which the money comes out.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
As others have pointed out, this is incorrect. The plan administrator must issue a 1099R to report the direct rollover, and the following instructions from p 5 of the 1099R Inst are very clear:CashConfessions wrote: ↑Wed Dec 01, 2021 9:00 am Hello,
Just got off the phone with Vanguard and want to validate what they told me. They said that the guidance below is IRS policy and not related to my specific former employer plan.Unfortunately, they couldn't point me to a specific IRS publication.
I have both Roth and traditional funds in a former employer's 401(K). I was calling about the ability to roll-over just the Roth portion of those funds to a Roth IRA. They said that I could do this, but the earnings on my previous Roth contributions would be taxable. However, if I wait until 59.5 years of age, and keep everything in the 401(K) those earnings are no longer "in limbo" and are tax-free from that point on.
For example -
Traditional 401(K) contributions and earnings on those contributions: $300K
Roth 401(K) contributions: $100K
Earnings on Roth 401(K) contributions: $50K
According to Vanguard, the $150K could be transferred to a Roth IRA, but I would have to pay taxes on $50K for this privilege.
Is this correct? There doesn't seem to be any logic behind it -- but I realize that may be asking too much.
Thanks in advance.
There is little chance the 1099R will be incorrect, however you must be careful when requesting this direct rollover. Be clear that you are only requesting that your designated Roth balance in the plan be rolled over to your Roth IRA. Be sure that you provide the correct Roth IRA account # on your request form. Once the rollover is done check your Roth IRA balance right away to confirm that the rollover was added to that account and that the rollover did not include any of your 401k balance in excess of the Roth 401k balance. Then update your Roth IRA basis accounting to incorporate the direct rollover into your Roth IRA basis. Basically, all your Roth 401k contributions (including any IRRs you did) will be treated as regular Roth IRA contributions. Gains in the Roth 401k will be treated as Roth IRA gains.For a direct rollover of a distribution from a designated
Roth account to a Roth IRA, enter the amount rolled over in
box 1 and 0 (zero) in box 2a. Use Code H in box 7.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
I'm afraid that I'm being pedantic, but I feel that the use of the word "pre-tax" is being confusing in their statement. In my mind (and perhaps only in my mind), "pre-tax" refers to money which has been contributed to a retirement vehicle, and, if it has not already been converted to a Roth, all earnings on that pre-tax money will ultimately be taxable, regardless of what rules one follows later.retiredjg wrote: ↑Thu Dec 02, 2021 8:44 am You may not like the wording, but what they said is correct as far as I can see.
Your earnings are pre-tax and would be taxable if withdrawn (not rolled over).
I don't see any contradiction myself. If you do this rollover, just make sure that you are 59.5 or disabled AND the Roth IRA itself is at least 5 years old before you take out the earnings.
Are you familiar with how money comes out of Roth IRA? I mean the order in which the money comes out.
In contrast, "earnings on Roth 401(K) contributions" suggests that those funds *may* be taxed, but only if one withdraws them before 59.5, or doesn't have financial hardship, etc. Otherwise, as long as one plays by the rules, the earnings are never taxed, whereas, in the previous case, earnings on non-converted pre-tax contributions will always be taxed.
Again, though, that's just how I see it, and I welcome alternative views or corrections.
Re: your point about withdrawing the earnings - I don't plan on doing so until at least 59.5/the Roth is at least 5 years old, but I appreciate the warning. This isn't really about accessing the money early, as much as it is about trying to clearly delineate between Roth and traditional IRA funds.
Finally, re: the order in which funds come out - contributions are taken out first, then earnings on the contributions, correct?
Thanks again for the feedback.
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
I don't know what to tell you. "Pre-tax" simply means those dollars have not yet been taxed. They are still subject to tax unless something happens (you jump through the hoops). It may not seem quite right to you, but that is the common usage as I understand it.
When you rollover Roth 401k to Roth IRA, your contributions go into contributions, the pre-tax earnings on those contributions go into the earnings bucket of the Roth IRA.
Close. It is contributions (which includes contributions to 401k that are rolled over), conversions (could be 5 year clocks here), then earnings.Finally, re: the order in which funds come out - contributions are taken out first, then earnings on the contributions, correct?
When you rollover Roth 401k to Roth IRA, your contributions go into contributions, the pre-tax earnings on those contributions go into the earnings bucket of the Roth IRA.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
It can be if you are rolling pretax money to a roth ira but that's not the case here.
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
FWIW, I read the transcript the way you describe. The use of "pre-tax" to describe Roth earnings is highly misleading/incorrect, but I do think that's what they were trying to describe.CashConfessions wrote: ↑Thu Dec 02, 2021 4:27 pmI'm afraid that I'm being pedantic, but I feel that the use of the word "pre-tax" is being confusing in their statement. In my mind (and perhaps only in my mind), "pre-tax" refers to money which has been contributed to a retirement vehicle, and, if it has not already been converted to a Roth, all earnings on that pre-tax money will ultimately be taxable, regardless of what rules one follows later.retiredjg wrote: ↑Thu Dec 02, 2021 8:44 am You may not like the wording, but what they said is correct as far as I can see.
Your earnings are pre-tax and would be taxable if withdrawn (not rolled over).
I don't see any contradiction myself. If you do this rollover, just make sure that you are 59.5 or disabled AND the Roth IRA itself is at least 5 years old before you take out the earnings.
Are you familiar with how money comes out of Roth IRA? I mean the order in which the money comes out.
In contrast, "earnings on Roth 401(K) contributions" suggests that those funds *may* be taxed, but only if one withdraws them before 59.5, or doesn't have financial hardship, etc. Otherwise, as long as one plays by the rules, the earnings are never taxed, whereas, in the previous case, earnings on non-converted pre-tax contributions will always be taxed.
Again, though, that's just how I see it, and I welcome alternative views or corrections.
Re: your point about withdrawing the earnings - I don't plan on doing so until at least 59.5/the Roth is at least 5 years old, but I appreciate the warning. This isn't really about accessing the money early, as much as it is about trying to clearly delineate between Roth and traditional IRA funds.
Finally, re: the order in which funds come out - contributions are taken out first, then earnings on the contributions, correct?
Thanks again for the feedback.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
I agree with both of you as well, pre-tax here is misleading. Traditional 401k contributions are pre-tax because you haven't paid taxes yet but you will when you withdraw. They are stating the situation backwards, too. Roth earnings are not "pre-tax unless you do something right". They are "tax-free unless you do something wrong". Some may say that's overly pedantic, but I think it's a fundamental difference. There are no more actions you need to take to make the earnings tax-free.twh wrote: ↑Thu Dec 02, 2021 6:54 pmFWIW, I read the transcript the way you describe. The use of "pre-tax" to describe Roth earnings is highly misleading/incorrect, but I do think that's what they were trying to describe.CashConfessions wrote: ↑Thu Dec 02, 2021 4:27 pm I'm afraid that I'm being pedantic, but I feel that the use of the word "pre-tax" is being confusing in their statement. In my mind (and perhaps only in my mind), "pre-tax" refers to money which has been contributed to a retirement vehicle, and, if it has not already been converted to a Roth, all earnings on that pre-tax money will ultimately be taxable, regardless of what rules one follows later.
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Retire2022 is correct. Moving pretax $ to Roth is not a roll-over. That is a conversion.placeholder wrote: ↑Thu Dec 02, 2021 6:45 pmIt can be if you are rolling pretax money to a roth ira but that's not the case here.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Not from a 401k it's a straight rollover reported on 1099.ut2sua wrote: ↑Thu Dec 02, 2021 7:51 pmRetire2022 is correct. Moving pretax $ to Roth is not a roll-over. That is a conversion.placeholder wrote: ↑Thu Dec 02, 2021 6:45 pmIt can be if you are rolling pretax money to a roth ira but that's not the case here.
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
This is correct; note the "if withdrawn." Rolling from a Roth 401(k) to a Roth IRA is not a taxable event, but if you withdraw the earnings from the Roth IRA before meeting the rules for qualified distributions, that would be taxable. (You can withdraw the contributions from the Roth IRA tax-free, just as you could withdraw contributions you had made to the Roth IRA.)CashConfessions wrote: ↑Thu Dec 02, 2021 8:18 am Appreciate everyone's comments. The reply from Vanguard follows.
Your inquiry >>
A rollover of the earnings on Roth contributions is not a taxable event.
However, since the earnings are pre-tax money, the assets would be
considered taxable income if withdrawn if certain requirements are not met.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Clearly state you want to rollover all pre-tax monies to a Traditional IRA, and all Roth monies to a Roth IRA. Such an event is completely tax-deferred. The clear intention stated on the recorded line gives you an outlet if there are any errors in processing.
This may be overkill, but if there's otherwise no rush to complete before year-end, I might wait until January 2022. Gives you time to catch any (unlikely) errors from the rollover, and for them to fix it with plenty of time in the year before the 1099-R generates in January 2023.
Conversely (again may be overkill) if they happen to mess it up in December 2021, there's far less time to fix it before January 2022 when the 1099-Rs generate.
This may be overkill, but if there's otherwise no rush to complete before year-end, I might wait until January 2022. Gives you time to catch any (unlikely) errors from the rollover, and for them to fix it with plenty of time in the year before the 1099-R generates in January 2023.
Conversely (again may be overkill) if they happen to mess it up in December 2021, there's far less time to fix it before January 2022 when the 1099-Rs generate.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Vanguard would disagree (emphasis added):placeholder wrote: ↑Thu Dec 02, 2021 9:18 pmNot from a 401k it's a straight rollover reported on 1099.ut2sua wrote: ↑Thu Dec 02, 2021 7:51 pmRetire2022 is correct. Moving pretax $ to Roth is not a roll-over. That is a conversion.placeholder wrote: ↑Thu Dec 02, 2021 6:45 pmIt can be if you are rolling pretax money to a roth ira but that's not the case here.
They're two separate processes that can be done at the same time in some cases, but it still involves a conversion.What you can do
Roll over a traditional 401(k) into a traditional IRA, tax-free.
Roll over a Roth 401(k) into a Roth IRA, tax-free.
Roll over a traditional 401(k) into a Roth IRA—this would be considered a "Roth conversion," so you'd owe taxes. Note: A Roth conversion that happens at the same time as your rollover may not be eligible for all plans. We can usually complete the Roth conversion once your pre-tax assets arrive into your Vanguard IRA account, though.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Thanks - there's no time pressure, so I definitely agree on the time-frame. I'm planning on either leaving the traditional 401(K) in my existing plan or moving it to my new employer's plan (both are really good) to avoid any issues with a backdoor Roth in the future -- should that option still exist.Lionel Hutz wrote: ↑Thu Dec 02, 2021 10:39 pm Clearly state you want to rollover all pre-tax monies to a Traditional IRA, and all Roth monies to a Roth IRA. Such an event is completely tax-deferred. The clear intention stated on the recorded line gives you an outlet if there are any errors in processing.
This may be overkill, but if there's otherwise no rush to complete before year-end, I might wait until January 2022. Gives you time to catch any (unlikely) errors from the rollover, and for them to fix it with plenty of time in the year before the 1099-R generates in January 2023.
Conversely (again may be overkill) if they happen to mess it up in December 2021, there's far less time to fix it before January 2022 when the 1099-Rs generate.
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Thanks for articulating it this way (the part I bolded above). You captured what I was thinking more eloquently than I did.TropikThunder wrote: ↑Thu Dec 02, 2021 7:46 pmI agree with both of you as well, pre-tax here is misleading. Traditional 401k contributions are pre-tax because you haven't paid taxes yet but you will when you withdraw. They are stating the situation backwards, too. Roth earnings are not "pre-tax unless you do something right". They are "tax-free unless you do something wrong". Some may say that's overly pedantic, but I think it's a fundamental difference. There are no more actions you need to take to make the earnings tax-free.twh wrote: ↑Thu Dec 02, 2021 6:54 pmFWIW, I read the transcript the way you describe. The use of "pre-tax" to describe Roth earnings is highly misleading/incorrect, but I do think that's what they were trying to describe.CashConfessions wrote: ↑Thu Dec 02, 2021 4:27 pm I'm afraid that I'm being pedantic, but I feel that the use of the word "pre-tax" is being confusing in their statement. In my mind (and perhaps only in my mind), "pre-tax" refers to money which has been contributed to a retirement vehicle, and, if it has not already been converted to a Roth, all earnings on that pre-tax money will ultimately be taxable, regardless of what rules one follows later.
Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
CashConfessions wrote: ↑Fri Dec 03, 2021 6:31 amThanks for articulating it this way (the part I bolded above). You captured what I was thinking more eloquently than I did.TropikThunder wrote: ↑Thu Dec 02, 2021 7:46 pmI agree with both of you as well, pre-tax here is misleading. Traditional 401k contributions are pre-tax because you haven't paid taxes yet but you will when you withdraw. They are stating the situation backwards, too. Roth earnings are not "pre-tax unless you do something right". They are "tax-free unless you do something wrong". Some may say that's overly pedantic, but I think it's a fundamental difference. There are no more actions you need to take to make the earnings tax-free.twh wrote: ↑Thu Dec 02, 2021 6:54 pmFWIW, I read the transcript the way you describe. The use of "pre-tax" to describe Roth earnings is highly misleading/incorrect, but I do think that's what they were trying to describe.CashConfessions wrote: ↑Thu Dec 02, 2021 4:27 pm I'm afraid that I'm being pedantic, but I feel that the use of the word "pre-tax" is being confusing in their statement. In my mind (and perhaps only in my mind), "pre-tax" refers to money which has been contributed to a retirement vehicle, and, if it has not already been converted to a Roth, all earnings on that pre-tax money will ultimately be taxable, regardless of what rules one follows later.
I do understand the language discomfort, but... apparently the quibble is with the IRS.
As retiredjg's link above shows, Vanguard is just using the same language that the IRS uses:
Can I roll over distributions from a designated Roth account to another employer's designated Roth account or into a Roth IRA?
Yes. However, because a distribution from a designated Roth account consists of both pre-tax money (earnings on the Roth contributions) and basis (Roth contributions), it must be rolled over into a designated Roth account in another plan through a direct rollover. [. . .]
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
op
see IRS chart for the for the differences between Roth IRA and Roth 401k (a Designated Roth Account)
Tax on nonqualified distributions, for Roth IRA Nonqualified distributions are distributed in this order:
Nontaxable contributions
Taxable earnings Roth Designated account: Nonqualified distributions are pro-rated between Roth contributions (nontaxable) and earnings (taxable)
5-year holding period for qualified distributions, Roth IRA Begins January 1 of the year a contribution is made to any Roth IRA.
For Designated Roth account: Separate for each Roth account and begins on January 1 of the year contributions made to that account. If one Roth account is rolled into another, the earlier start date applies.
https://www.irs.gov/retirement-plans/te ... th-account
see IRS chart for the for the differences between Roth IRA and Roth 401k (a Designated Roth Account)
Tax on nonqualified distributions, for Roth IRA Nonqualified distributions are distributed in this order:
Nontaxable contributions
Taxable earnings Roth Designated account: Nonqualified distributions are pro-rated between Roth contributions (nontaxable) and earnings (taxable)
5-year holding period for qualified distributions, Roth IRA Begins January 1 of the year a contribution is made to any Roth IRA.
For Designated Roth account: Separate for each Roth account and begins on January 1 of the year contributions made to that account. If one Roth account is rolled into another, the earlier start date applies.
https://www.irs.gov/retirement-plans/te ... th-account
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
Yes, thanks to you and retiredjg - the quibble is with the IRS's language. Nothing to be done, sadly. But thank you both for the links.cas wrote: ↑Fri Dec 03, 2021 6:38 amCashConfessions wrote: ↑Fri Dec 03, 2021 6:31 amThanks for articulating it this way (the part I bolded above). You captured what I was thinking more eloquently than I did.TropikThunder wrote: ↑Thu Dec 02, 2021 7:46 pmI agree with both of you as well, pre-tax here is misleading. Traditional 401k contributions are pre-tax because you haven't paid taxes yet but you will when you withdraw. They are stating the situation backwards, too. Roth earnings are not "pre-tax unless you do something right". They are "tax-free unless you do something wrong". Some may say that's overly pedantic, but I think it's a fundamental difference. There are no more actions you need to take to make the earnings tax-free.twh wrote: ↑Thu Dec 02, 2021 6:54 pmFWIW, I read the transcript the way you describe. The use of "pre-tax" to describe Roth earnings is highly misleading/incorrect, but I do think that's what they were trying to describe.CashConfessions wrote: ↑Thu Dec 02, 2021 4:27 pm I'm afraid that I'm being pedantic, but I feel that the use of the word "pre-tax" is being confusing in their statement. In my mind (and perhaps only in my mind), "pre-tax" refers to money which has been contributed to a retirement vehicle, and, if it has not already been converted to a Roth, all earnings on that pre-tax money will ultimately be taxable, regardless of what rules one follows later.
I do understand the language discomfort, but... apparently the quibble is with the IRS.
As retiredjg's link above shows, Vanguard is just using the same language that the IRS uses:
Can I roll over distributions from a designated Roth account to another employer's designated Roth account or into a Roth IRA?
Yes. However, because a distribution from a designated Roth account consists of both pre-tax money (earnings on the Roth contributions) and basis (Roth contributions), it must be rolled over into a designated Roth account in another plan through a direct rollover. [. . .]
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Re: Rollover from Roth 401(k) to Roth IRA a taxable event - True?
An explicit conversion requires filling out form 8606 which you don't do in this case although the irs publications state that in the case of a taxable rollover to roth the same conversion rules apply.TropikThunder wrote: ↑Fri Dec 03, 2021 12:29 am They're two separate processes that can be done at the same time in some cases, but it still involves a conversion.