no 5 year wait on converted Roth coming from a previous employer 401k?

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sidwin516
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no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

So i left my previous job with about 750k worth of in it. 620k worth of pretax including employer contribution and 130k worth of after tax. I hate how fidelity jumbles them both together and gives you a percentage that you have to calculate. Talking to my financial guy he said i should roll it into my new job that i've been for a year. we don't have any matching here so i've been putting everything in Roth 401k since we also don't have mega roth in plan conversions.

I've read that if you take pre-tax investments and convert them to roth you have to wait 5 year. Fidelity said that isn't the case if it is 401k funds. Is that true?

This is my game plan. I plan on leaving the 130k of after tax with my previous employer with fidelity. Then i was thinking of bringing over 300k into my current employer. I know i will be mixing pre and post tax funds again but my plan b is retire at 55 so i really want to make sure i can use the rule of 55. In all honesty, i'm 44 now i really doubt i continue working until i'm 55. I'm thinking within the next 3-6 years i'm done. The 320k left, since my current employer doesn't have in plan mega roth conversions, i'm going to convert 30k a year. I'll pay the 30% taxes on it but at least at that rate if i retire when i'm 50, i will still have access to that money without 10% penalty if i just withdrawal my base without gains.

input and advice appreciated.
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grabiner
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by grabiner »

You do have the same 5-year rule. From Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs):
IRS Publication 590-B wrote:If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or roll over an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You must generally pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover.
Thus, if you roll the pre-tax amount into a Roth IRA in 2021, you will owe the 10% penalty if you withdraw that amount from your Roth IRA before 2026 (and don't meet any of the other exceptions) If you roll the after-tax amount into a Roth IRA in 2021, you can withdraw it penalty-free since it was not included in income; this is the 401(k) analogue of a backdoor Roth IRA.
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

grabiner wrote: Thu Dec 02, 2021 9:10 am You do have the same 5-year rule. From Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs):
IRS Publication 590-B wrote:If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or roll over an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You must generally pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover.
Thus, if you roll the pre-tax amount into a Roth IRA in 2021, you will owe the 10% penalty if you withdraw that amount from your Roth IRA before 2026 (and don't meet any of the other exceptions) If you roll the after-tax amount into a Roth IRA in 2021, you can withdraw it penalty-free since it was not included in income; this is the 401(k) analogue of a backdoor Roth IRA.
Thank u for the link. I thought he was wrong about the moving the 401k to my existing Roth. Now that being said I’m confused with your second paragraph. There is a 10% penalty when u move your 401k to external Roth? I know I have to pay federal state and ssi on that money but I haven’t heard of a 10% penalty on top.

Thanks - Sid
tashnewbie
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by tashnewbie »

sidwin516 wrote: Thu Dec 02, 2021 9:37 am
grabiner wrote: Thu Dec 02, 2021 9:10 am You do have the same 5-year rule. From Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs):
IRS Publication 590-B wrote:If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or roll over an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You must generally pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover.
Thus, if you roll the pre-tax amount into a Roth IRA in 2021, you will owe the 10% penalty if you withdraw that amount from your Roth IRA before 2026 (and don't meet any of the other exceptions) If you roll the after-tax amount into a Roth IRA in 2021, you can withdraw it penalty-free since it was not included in income; this is the 401(k) analogue of a backdoor Roth IRA.
Thank u for the link. I thought he was wrong about the moving the 401k to my existing Roth. Now that being said I’m confused with your second paragraph. There is a 10% penalty when u move your 401k to external Roth? I know I have to pay federal state and ssi on that money but I haven’t heard of a 10% penalty on top.

Thanks - Sid
That 10% penalty is owed if you withdraw the money before it has "seasoned" for 5 (tax) years. Note @Grabiner said you'd owe it if withdrawals are done before 2026, if you rolled over in 2021. That's the 5-year rule.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by grabiner »

sidwin516 wrote: Thu Dec 02, 2021 9:37 am
grabiner wrote: Thu Dec 02, 2021 9:10 am You do have the same 5-year rule. From Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs):
IRS Publication 590-B wrote:If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or roll over an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You must generally pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover.
Thus, if you roll the pre-tax amount into a Roth IRA in 2021, you will owe the 10% penalty if you withdraw that amount from your Roth IRA before 2026 (and don't meet any of the other exceptions) If you roll the after-tax amount into a Roth IRA in 2021, you can withdraw it penalty-free since it was not included in income; this is the 401(k) analogue of a backdoor Roth IRA.
Thank u for the link. I thought he was wrong about the moving the 401k to my existing Roth. Now that being said I’m confused with your second paragraph. There is a 10% penalty when u move your 401k to external Roth? I know I have to pay federal state and ssi on that money but I haven’t heard of a 10% penalty on top.
You should pay only federal and state tax; Social Security was withheld on the wages even though you contributed them to the 401(k).

And as noted above, the 10% penalty applies only for an early withdrawal. Rolling a 401(k) to an IRA (traditional or Roth) is not a withdrawal, but you might owe the 10% penalty if you then withdraw the money from the IRA before meeting the timing rules. If you roll into a Roth IRA in 2021, and withdraw in 2026, you have met the 5-year rule and there is no 10% penalty. If you withdraw in 2025, you would owe the 10% penalty on the taxable amount of the rollover.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by David Jay »

sidwin516 wrote: Thu Dec 02, 2021 9:37 am
grabiner wrote: Thu Dec 02, 2021 9:10 am You do have the same 5-year rule. From Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs):
IRS Publication 590-B wrote:If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or roll over an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You must generally pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover.
Thus, if you roll the pre-tax amount into a Roth IRA in 2021, you will owe the 10% penalty if you withdraw that amount from your Roth IRA before 2026 (and don't meet any of the other exceptions) If you roll the after-tax amount into a Roth IRA in 2021, you can withdraw it penalty-free since it was not included in income; this is the 401(k) analogue of a backdoor Roth IRA.
Thank u for the link. I thought he was wrong about the moving the 401k to my existing Roth. Now that being said I’m confused with your second paragraph. There is a 10% penalty when u move your 401k to external Roth? I know I have to pay federal state and ssi on that money but I haven’t heard of a 10% penalty on top.

Thanks - Sid
The confusion is that in the second paragraph David G is talking about doing a rollover of your “regular” pre-tax 401K to Roth.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by RetiredAL »

sidwin516 wrote: Wed Dec 01, 2021 11:01 pm So i left my previous job with about 750k worth of in it. 620k worth of pretax including employer contribution and 130k worth of after tax. I hate how fidelity jumbles them both together and gives you a percentage that you have to calculate.
When I retired 5 years ago, the Fidelity 401K people handed the rolling over of my post-tax to my Fidelity Roth and my pre-tax to my Fidelity tIRA. They knew exactly how much was in those tax buckets and how to roll it accordingly. The Roth existed before this event, the tIRA was created for this event. I found the Fidelity 401K people very helpful in explaining and getting all the various paperwork to me, cross checking the submitted forms with me on the phone, and finally executing the actual rollover with me on the phone. Since they journal the transfer entries, I could instantly see and verify the balances in the destination accounts. Most of my 401K holdings were CIT's, so I sold everything the day before, they transferred cash, and I re-bought the Fidelity Retail Funds equivalent to those CIT's the day of the transfer.

My pension's lump sum, handled by Fidelity, rolled-over to its own IRA 30 days later (per schedule) without any further action on my part.

When one's 401K custodian is a big brokerage such as Fidelity, Schwab, or Vanguard, just go with the rollovers to that brokerage's Traditional and/or Roth IRA's. Doing so eliminates are the complexity of issuing checks (as FBO) when the rollovers go to a different brokerage and validating/fixing any errors that crop up. If that brokerages are not where you want your IRA's to be long term, then have the new brokerage initiate an ACATS transfer of the IRA sometime later.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Oregano »

sidwin516 wrote: Wed Dec 01, 2021 11:01 pm So i left my previous job with about 750k worth of in it. 620k worth of pretax including employer contribution and 130k worth of after tax. I hate how fidelity jumbles them both together and gives you a percentage that you have to calculate. Talking to my financial guy he said i should roll it into my new job that i've been for a year. we don't have any matching here so i've been putting everything in Roth 401k since we also don't have mega roth in plan conversions.

I've read that if you take pre-tax investments and convert them to roth you have to wait 5 year. Fidelity said that isn't the case if it is 401k funds. Is that true?

This is my game plan. I plan on leaving the 130k of after tax with my previous employer with fidelity. Then i was thinking of bringing over 300k into my current employer. I know i will be mixing pre and post tax funds again but my plan b is retire at 55 so i really want to make sure i can use the rule of 55. In all honesty, i'm 44 now i really doubt i continue working until i'm 55. I'm thinking within the next 3-6 years i'm done. The 320k left, since my current employer doesn't have in plan mega roth conversions, i'm going to convert 30k a year. I'll pay the 30% taxes on it but at least at that rate if i retire when i'm 50, i will still have access to that money without 10% penalty if i just withdrawal my base without gains.

input and advice appreciated.
Am I missing something here? You have 130k of after-tax funds that you could roll to a Roth IRA tax-free right now, AND POSSIBLY NEVER AGAIN AFTER 12/31/2021, and your financial guy advised you to do something else? If I'm understanding this correctly, you've been given really bad advice. Roll the after-tax funds to a Roth IRA ASAP so it is completed before year-end when that option may disappear.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by HomeStretch »

Will your current 401k plan allow rollovers in from a Rollover (pretax) IRA?

Does your current 401k plan have good low-cost fund choices? You mentioned there is no employer match which means it might be a small employer plan (which aren’t always low-cost plans for participants).

If yes to both (and assuming your state has decent IRA protection and you didn’t do a 2021 backdoor Roth)… consider rolling over your old Fidelity 401k plan by 12/31/21 to a Fidelity Rollover IRA (401k pretax balance) and Fidelity Roth IRA (401k aftertax balance). Since the sending and receiving accounts are both with Fidelity, the rollovers should get down before 12/31/21.

Once everything settles, you can either convert the IRA to Roth (tax withholdings on the conversion, if any, are subject to a 10% penalty <age 59-1/2) or rollover the Fidelity Rollover IRA to your new 401k in case you are able to use the ‘Rule of 55’.

Consider DIY investing your Fidelity Roth IRA over paying an AUM fee to an advisor.
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

Oregano wrote: Fri Dec 03, 2021 12:54 pm
sidwin516 wrote: Wed Dec 01, 2021 11:01 pm So i left my previous job with about 750k worth of in it. 620k worth of pretax including employer contribution and 130k worth of after tax. I hate how fidelity jumbles them both together and gives you a percentage that you have to calculate. Talking to my financial guy he said i should roll it into my new job that i've been for a year. we don't have any matching here so i've been putting everything in Roth 401k since we also don't have mega roth in plan conversions.

I've read that if you take pre-tax investments and convert them to roth you have to wait 5 year. Fidelity said that isn't the case if it is 401k funds. Is that true?

This is my game plan. I plan on leaving the 130k of after tax with my previous employer with fidelity. Then i was thinking of bringing over 300k into my current employer. I know i will be mixing pre and post tax funds again but my plan b is retire at 55 so i really want to make sure i can use the rule of 55. In all honesty, i'm 44 now i really doubt i continue working until i'm 55. I'm thinking within the next 3-6 years i'm done. The 320k left, since my current employer doesn't have in plan mega roth conversions, i'm going to convert 30k a year. I'll pay the 30% taxes on it but at least at that rate if i retire when i'm 50, i will still have access to that money without 10% penalty if i just withdrawal my base without gains.

input and advice appreciated.
Am I missing something here? You have 130k of after-tax funds that you could roll to a Roth IRA tax-free right now, AND POSSIBLY NEVER AGAIN AFTER 12/31/2021, and your financial guy advised you to do something else? If I'm understanding this correctly, you've been given really bad advice. Roll the after-tax funds to a Roth IRA ASAP so it is completed before year-end when that option may disappear.
Good point… I will have that moved to my fidelity Roth account before the end of the year.
This is what I have:

Inside company A 401k I have pre-tax 600k and post tax 135k. Had at fidelity
Inside company B ROth 401k and I have about 20k in there held at fidelity
With Fidelity I also have an IRA account that has 0 in it but I use it for all my back door Roth IRA.
I also have a Roth IRA with FIdelity that is sitting on 20k there as well.

I was hoping to have access to my funds within the next 3 years to use at age 47. And this is what I was thinking:

1.Move 300k from Company A fidelity to company B. Since currently I only have a Roth 401k at the new job I’m guess Fidelity will open a 401k there for me too.
2. Move the 135k from Company A that is after tax, move that to my Fidelity Roth account and continue buying my VTSAX, etc.
3. Leave the 300k and move 50k a year over into my Roth IRA and pay the taxes. I won’t have 10% penalty but I will have to pay other taxes on it.

When I decide to retire, I will start to draw upon my brokerage accounts first. After that is depleted, then I will go to get my contributions from my personal Roth account. If I’m 55.5 when it happens then, I’ll start taking from my last company 401k.

How does that sound? Thank u for everyone input. Thanks for clearing terms and conditions up. I truly appreciate it.
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

I logged into NetBenefits today and the funds are broken down to

ROLLOVER 49.59%
PRE-TAX BI-WEEKLY PAY 21.72%
ROTH IN-PLAN CONVERSION 16.06%
EMPLOYER MATCH 11.33%
PRE-TAX BONUS/COMM 1.30%

So if that is the case, I don’t have to worry about the gains that my Roth-in plan conversion is making right? The gains won’t be taxable correct?

I remember when I first started doing these after tax contributions, I used to have to call once a quarter and have them converted.
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retiredjg
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

sidwin516 wrote: Sat Dec 04, 2021 12:52 am I logged into NetBenefits today and the funds are broken down to

ROLLOVER 49.59%
PRE-TAX BI-WEEKLY PAY 21.72%
ROTH IN-PLAN CONVERSION 16.06%
EMPLOYER MATCH 11.33%
PRE-TAX BONUS/COMM 1.30%

So if that is the case, I don’t have to worry about the gains that my Roth-in plan conversion is making right? The gains won’t be taxable correct?

I remember when I first started doing these after tax contributions, I used to have to call once a quarter and have them converted.
It appears that this is just the Old 401k.

In your first post, you used the term "after tax" to describe some of the money in your Old 401k. Unfortunately, "after-tax" can mean many different things and these different things do not all receive the same tax treatment. Unfortunately, people who have responded above have not all been talking about the same thing.

Now that we know that your $130k in "after-tax" is actually Roth 401k from in-plan rollovers (IRR) people can respond more correctly (because some of the earlier replies do not apply to you at all).

If your Old 401k will allow you to do partial distributions, your plan will work but I'm not sure the conversion part is a good idea (see below).

The Old Roth 401k IRRs will roll directly into the basis of your current Roth IRA and be treated just like ordinary Roth IRA contributions. The earnings that have occurred inside the Old Roth 401k will roll into the earnings bucket of your current Roth IRA (not available without tax or penalty until you are 59.5).

So no, there is no 5 year wait on the IRR portion of the $130k (but keep in mind that some of that $130k is earnings, not IRR).

As for the rest of the Old 401k, you intend to roll some into the New 401k and convert the rest to Roth IRA $30k at a time. We don't know your tax situation, but converting at 30% tax is generally not a good idea. It is likely it would be better to convert that during early retirement when your tax rate is lower.

I also question the idea of using only Roth contributions in your New 401k - again, with your current tax rate at 30%, it is likely that using traditional 401k for some or all of your current contributions is the better idea.

Based on the limited information given, I suggest that you roll the Old Roth 401k (from IRRs) to Roth IRA and roll the rest of the Old 401k into the New 401k.
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

retiredjg wrote: Sat Dec 04, 2021 8:30 am
sidwin516 wrote: Sat Dec 04, 2021 12:52 am I logged into NetBenefits today and the funds are broken down to

ROLLOVER 49.59%
PRE-TAX BI-WEEKLY PAY 21.72%
ROTH IN-PLAN CONVERSION 16.06%
EMPLOYER MATCH 11.33%
PRE-TAX BONUS/COMM 1.30%

So if that is the case, I don’t have to worry about the gains that my Roth-in plan conversion is making right? The gains won’t be taxable correct?

I remember when I first started doing these after tax contributions, I used to have to call once a quarter and have them converted.
It appears that this is just the Old 401k.

In your first post, you used the term "after tax" to describe some of the money in your Old 401k. Unfortunately, "after-tax" can mean many different things and these different things do not all receive the same tax treatment. Unfortunately, people who have responded above have not all been talking about the same thing.

Now that we know that your $130k in "after-tax" is actually Roth 401k from in-plan rollovers (IRR) people can respond more correctly (because some of the earlier replies do not apply to you at all).

If your Old 401k will allow you to do partial distributions, your plan will work but I'm not sure the conversion part is a good idea (see below).

The Old Roth 401k IRRs will roll directly into the basis of your current Roth IRA and be treated just like ordinary Roth IRA contributions. The earnings that have occurred inside the Old Roth 401k will roll into the earnings bucket of your current Roth IRA (not available without tax or penalty until you are 59.5).

So no, there is no 5 year wait on the IRR portion of the $130k (but keep in mind that some of that $130k is earnings, not IRR).

As for the rest of the Old 401k, you intend to roll some into the New 401k and convert the rest to Roth IRA $30k at a time. We don't know your tax situation, but converting at 30% tax is generally not a good idea. It is likely it would be better to convert that during early retirement when your tax rate is lower.

I also question the idea of using only Roth contributions in your New 401k - again, with your current tax rate at 30%, it is likely that using traditional 401k for some or all of your current contributions is the better idea.

Based on the limited information given, I suggest that you roll the Old Roth 401k (from IRRs) to Roth IRA and roll the rest of the Old 401k into the New 401k.
Thank u very much for your explanation.

The reasoning I was going to convert some funds from 401k to Roth IRA was so if I ran out of money to live off, I could touch the contribution I converted over. The next reason was my new job doesn’t have IRR. That’s why I went with Roth 401k since I plan on retiring in a few years. With my new job I took a pay cut worth of $40k a year so that’s why I was thinking if I convert 40k a year out of it, it would be the same amount of taxes I was paying last year.

Appreciate all the advice. I got some homework to do.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

Well, if you do end up doing Roth conversions from the Old 401k, those conversions WILL have the 5 tax year clock, so plan accordingly and keep good records. And to avoid penalty, taxes will have to be paid from savings or salary, not from the old 401k.

Your current $800kish will not go a long way for such a long retirement unless your living expenses are very very low. For that reason, I hope you have more assets than mentioned in your post.
Oregano
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Oregano »

sidwin516 wrote: Fri Dec 03, 2021 9:07 pm When I decide to retire, I will start to draw upon my brokerage accounts first. After that is depleted, then I will go to get my contributions from my personal Roth account. If I’m 55.5 when it happens then, I’ll start taking from my last company 401k.
Are you sure you understand age 55 distributions from 401(k)'?. You can only take those out penalty free before age 59.5 if you retire during the year that you turn age 55. Since you're talking about retiring at age 47, you would not be exempt from the penalty at age 55.

Without digging into details, your general strategies for taking out funds prior to age 59.5 are create a Roth conversion ladder; a) convert pre-tax dollars to Roth each year; b) withdraw up to the basis amount of each contribution 5 years later (5 years for each separate conversion). You also have an opportunity to take Substantially Equal Periodic Payments.

If you can't cover all of your expenses uses those two methods, then you are going to end up paying penalties. Note that it may actually be beneficial to do that in some scenarios. For example, converting to Roth while working and being taxed in the 24% tax bracket may be inferior to taking taxable distributions in the 12% tax bracket + 10% penalty.

And here's the other thing: if you are going to have trouble getting enough out of your retirement accounts to get to age 59.5, are you going to have enough to pay for the rest of your life?
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

Thanks oregano. I’m going to keep working as long as I’m having fun. 55.5 is my pipe dream but want to make sure I leave that option open. I think more likely it will be 2-3 years. The vast majority of my expenses when I’m retired will be my kids college. But I’m pretty sure I have all of that covered with 529. I’m thinking I can make by 50k a year after taxes. Until I get to whatever age 55.5 or 59.5.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Alan S. »

sidwin516 wrote: Sat Dec 04, 2021 6:14 pm Thanks oregano. I’m going to keep working as long as I’m having fun. 55.5 is my pipe dream but want to make sure I leave that option open. I think more likely it will be 2-3 years. The vast majority of my expenses when I’m retired will be my kids college. But I’m pretty sure I have all of that covered with 529. I’m thinking I can make by 50k a year after taxes. Until I get to whatever age 55.5 or 59.5.
The age 55 separation exception to the 10% penalty is triggered by separating in the year you reach 55 (not 55.5) or later. If your birthday is very late in the year, you can actually separate shortly after your 54th birthday because you will be reaching 55 before year end.

However, this penalty exception is severely compromised if your 401k does not allow you take flexible distributions as needed. If the plan requires any distribution to be a lump sum, then the additional tax due by spiking your bracket that year may entirely offset the benefit of not owing the penalty. If your plan requires a lump sum distribution, then Plan B would be to roll it over to an IRA and start a 72t plan.
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

Alan S. wrote: Sun Dec 05, 2021 10:34 am
sidwin516 wrote: Sat Dec 04, 2021 6:14 pm Thanks oregano. I’m going to keep working as long as I’m having fun. 55.5 is my pipe dream but want to make sure I leave that option open. I think more likely it will be 2-3 years. The vast majority of my expenses when I’m retired will be my kids college. But I’m pretty sure I have all of that covered with 529. I’m thinking I can make by 50k a year after taxes. Until I get to whatever age 55.5 or 59.5.
The age 55 separation exception to the 10% penalty is triggered by separating in the year you reach 55 (not 55.5) or later. If your birthday is very late in the year, you can actually separate shortly after your 54th birthday because you will be reaching 55 before year end.

However, this penalty exception is severely compromised if your 401k does not allow you take flexible distributions as needed. If the plan requires any distribution to be a lump sum, then the additional tax due by spiking your bracket that year may entirely offset the benefit of not owing the penalty. If your plan requires a lump sum distribution, then Plan B would be to roll it over to an IRA and start a 72t plan.
thanks alan. i didn't think about that. i was assuming my current employer would allow it.
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

provide an update. i got an email from fidelity rep at my old company. they put a stop on the transfer to the new fidelity. something about they want to withdrawal some of the matching they gave me. insane considering i left that company 11 months ago.

so now that we know the break down of the funds, it would be safe to say i could potentially leave the IRR funds there and draw on the principal whenever i feel like it without tax implications starting 2023 since the account was first opened in 2018 correct?

My personal Roth IRA was created at the same time. So i'm guessing 2023 would be suffice to start drawing on those funds if i need to. I'm hoping not to need to touch any of this stuff until 50 which is 6 years away. I worked with Fidelity and my local bank with their monte carlo simulations and every one is telling me i have more than enough for retirement but the problem 3 years ago was i didn't have enough after tax funds. That's when i started doing IRR and my own personal Roth IRA for my wife and I. Now that I can't participate in IRR at my current job, i've been taking that funds in purchasing VTSAX and FAANG.

thanks!
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retiredjg
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

sidwin516 wrote: Fri Dec 10, 2021 10:12 am so now that we know the break down of the funds, it would be safe to say i could potentially leave the IRR funds there and draw on the principal whenever i feel like it without tax implications starting 2023 since the account was first opened in 2018 correct?
No. That is not correct.

If you withdraw from Roth 401k before age 59.5, the contributions (conversions in your case) and the earnings that have built up inside the Roth 401k will have to be pro-rated. In other words, any withdrawal will include some earnings which will have tax and a 10% penalty.

If you want to use that money, roll it to Roth IRA. Roth IRA has different withdrawal rules from Roth 401k. In Roth IRA, you will be allowed to withdraw the contributions (conversions in this case) while leaving the earnings behind.


My personal Roth IRA was created at the same time. So i'm guessing 2023 would be suffice to start drawing on those funds if i need to.
Again, no (or probably not).

Your direct contributions to Roth IRA are available any time, no 5 year wait. The earnings from those contributions are not available without tax and/or penalty until you are 59.5 years old.

But it appears your Roth is probably backdoor and the rules are different for that. Please confirm.
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

retiredjg wrote: Fri Dec 10, 2021 10:45 am
sidwin516 wrote: Fri Dec 10, 2021 10:12 am so now that we know the break down of the funds, it would be safe to say i could potentially leave the IRR funds there and draw on the principal whenever i feel like it without tax implications starting 2023 since the account was first opened in 2018 correct?
No. That is not correct.

If you withdraw from Roth 401k before age 59.5, the contributions (conversions in your case) and the earnings that have built up inside the Roth 401k will have to be pro-rated. In other words, any withdrawal will include some earnings which will have tax and a 10% penalty.

If you want to use that money, roll it to Roth IRA. Roth IRA has different withdrawal rules from Roth 401k. In Roth IRA, you will be allowed to withdraw the contributions (conversions in this case) while leaving the earnings behind.


My personal Roth IRA was created at the same time. So i'm guessing 2023 would be suffice to start drawing on those funds if i need to.
Again, no (or probably not).

Your direct contributions to Roth IRA are available any time, no 5 year wait. The earnings from those contributions are not available without tax and/or penalty until you are 59.5 years old.

But it appears your Roth is probably backdoor and the rules are different for that. Please confirm.
yes my personal roth are all back door roth's.

thanks for the info about the 401k in plan is pro-rata. that sucks but at least i know i can roll that out.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Lee_WSP »

So long as you've had any Roth accounts opened for five tax calendar years, you may withdraw the principal penalty free.

According to kitces, unless I've read it wrong.
Last edited by Lee_WSP on Sat Dec 11, 2021 4:26 pm, edited 1 time in total.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

Withdrawal from Roth IRA with backdoor contributions is a little more complicated.

Withdrawal from Roth IRA goes like this

1. Contributions (direct or rollover from Roth 401k) - available any time, no 5 year seasoning required; when all are used up....

2. Conversions - oldest conversion by year, taxable portion first, non-taxable portion second; then next oldest conversion by year, taxable portion first followed by the non-taxable portion, and so on until all conversions are used up....

3. Earnings that have occurred inside the Roth IRA (or were rolled over from Roth 401k) - not available without tax and/or penalty until you are 59.5 years old.


Your backdoor Roth contributions are #2 above. If you converted before any earnings, then the taxable portion of that year's conversion is $0.

If you had $100 in earnings and converted $5,600 after a $5,500 contribution, then the $100 comes out first and if the 5 tax year clock has not finished, that $100 has a 10% penalty. Then the $5,500 is available with no penalty. Then you move on to the next oldest year's conversions.

Take some time to digest this and start bringing your records up to date if you need to. All the amounts and dates will be needed to calculate if any part of a Roth IRA withdrawal is taxable or not (or has a penalty or not).
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

Lee_WSP wrote: Fri Dec 10, 2021 1:35 pm So long as you've had any Roth accounts opened for five tax calendar years, you may withdraw the principal penalty free.
A lot of people think this, but it is not correct. If you make a direct contribution to Roth IRA, it is available immediately for withdrawal. No waiting is required.

Backdoor contributions could go either way - depending on if there was anything taxable when the conversion happened.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Lee_WSP »

retiredjg wrote: Fri Dec 10, 2021 2:02 pm
Lee_WSP wrote: Fri Dec 10, 2021 1:35 pm So long as you've had any Roth accounts opened for five tax calendar years, you may withdraw the principal penalty free.
A lot of people think this, but it is not correct. If you make a direct contribution to Roth IRA, it is available immediately for withdrawal. No waiting is required.

Backdoor contributions could go either way - depending on if there was anything taxable when the conversion happened.
That's not what I said. The question was if he could withdraw the converted amounts penalty and tax free.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by gobel »

Lee_WSP wrote: Fri Dec 10, 2021 2:37 pm
retiredjg wrote: Fri Dec 10, 2021 2:02 pm
Lee_WSP wrote: Fri Dec 10, 2021 1:35 pm So long as you've had any Roth accounts opened for five tax calendar years, you may withdraw the principal penalty free.
A lot of people think this, but it is not correct. If you make a direct contribution to Roth IRA, it is available immediately for withdrawal. No waiting is required.

Backdoor contributions could go either way - depending on if there was anything taxable when the conversion happened.
That's not what I said. The question was if he could withdraw the converted amounts penalty and tax free.
That sounds wrong then. If the converted amount contained pre-tax amounts, then you have to wait 5 years or be over 59.5 to withdraw that part w/o penalty. If the converted amount was completely after-tax, then neither 5-year wait applies (on the converted amount).

There's a table in the Roth IRA wiki page that illustrates this nicely.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Lee_WSP »

gobel wrote: Fri Dec 10, 2021 3:55 pm
Lee_WSP wrote: Fri Dec 10, 2021 2:37 pm
retiredjg wrote: Fri Dec 10, 2021 2:02 pm
Lee_WSP wrote: Fri Dec 10, 2021 1:35 pm So long as you've had any Roth accounts opened for five tax calendar years, you may withdraw the principal penalty free.
A lot of people think this, but it is not correct. If you make a direct contribution to Roth IRA, it is available immediately for withdrawal. No waiting is required.

Backdoor contributions could go either way - depending on if there was anything taxable when the conversion happened.
That's not what I said. The question was if he could withdraw the converted amounts penalty and tax free.
That sounds wrong then. If the converted amount contained pre-tax amounts, then you have to wait 5 years or be over 59.5 to withdraw that part w/o penalty. If the converted amount was completely after-tax, then neither 5-year wait applies (on the converted amount).

There's a table in the Roth IRA wiki page that illustrates this nicely.
See 26 USC 408a
(B) Distributions within nonexclusion period
A payment or distribution from a Roth IRA shall not be treated as a qualified distribution under subparagraph (A) if such payment or distribution is made within the 5-taxable year period beginning with the first taxable year for which the individual made a contribution to a Roth IRA (or such individual’s spouse made a contribution to a Roth IRA) established for such individual.

A conversion is not a direct contribution, which follows a different rule.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Alan S. »

Lee_WSP wrote: Fri Dec 10, 2021 4:34 pm
See 26 USC 408a
(B) Distributions within nonexclusion period
A payment or distribution from a Roth IRA shall not be treated as a qualified distribution under subparagraph (A) if such payment or distribution is made within the 5-taxable year period beginning with the first taxable year for which the individual made a contribution to a Roth IRA (or such individual’s spouse made a contribution to a Roth IRA) established for such individual.

A conversion is not a direct contribution, which follows a different rule.
The above tax code section deals with the income tax on Roth distributions and in not related to the 10% penalty.

However, the contribution referred to in the above section includes both regular and conversion contributions. The Roth IRA 5 year clock for determining qualification starts with the first contribution of any type as long as it's not an excess contribution.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Lee_WSP »

Alan S. wrote: Fri Dec 10, 2021 6:46 pm
Lee_WSP wrote: Fri Dec 10, 2021 4:34 pm
See 26 USC 408a
(B) Distributions within nonexclusion period
A payment or distribution from a Roth IRA shall not be treated as a qualified distribution under subparagraph (A) if such payment or distribution is made within the 5-taxable year period beginning with the first taxable year for which the individual made a contribution to a Roth IRA (or such individual’s spouse made a contribution to a Roth IRA) established for such individual.

A conversion is not a direct contribution, which follows a different rule.
The above tax code section deals with the income tax on Roth distributions and in not related to the 10% penalty.

However, the contribution referred to in the above section includes both regular and conversion contributions. The Roth IRA 5 year clock for determining qualification starts with the first contribution of any type as long as it's not an excess contribution.
Which section deals with it then?

The conversion withdrawal needs to be qualified to avoid the penalty as it's not a return of contributions.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

Lee_WSP wrote: Fri Dec 10, 2021 6:54 pm The conversion withdrawal needs to be qualified to avoid the penalty as it's not a return of contributions.
It is my understanding that it does not need to be qualified to avoid penalty.

It is true that all qualified distributions do not have a penalty. But I do not believe it is correct that a distribution of a conversion must be qualified to avoid penalty. Here are two examples.

1. The conversion contained no taxable amount and the taxpayer is not yet 59.5 years old. Withdrawing the conversion even the next week would have no penalty. It is only the taxable part of a conversion that carries the clock and penalty.

2. The conversion was partially or fully taxable, the 5 years have passed, but the taxpayer is not yet 59.5. Again, the Roth IRA is not yet qualified but there is no penalty.

I'm assuming that a "qualified distribution" must come from a "qualified Roth IRA". If it is possible to have a qualified distribution from a Roth IRA that is not yet qualified, then my terminology is incorrect, but I feel confident the penalty part is correct.

Perhaps Alan will comment.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Lee_WSP »

retiredjg wrote: Sat Dec 11, 2021 10:20 am
Lee_WSP wrote: Fri Dec 10, 2021 6:54 pm The conversion withdrawal needs to be qualified to avoid the penalty as it's not a return of contributions.
It is my understanding that it does not need to be qualified to avoid penalty.

It is true that all qualified distributions do not have a penalty. But I do not believe it is correct that a distribution of a conversion must be qualified to avoid penalty. Here are two examples.

1. The conversion contained no taxable amount and the taxpayer is not yet 59.5 years old. Withdrawing the conversion even the next week would have no penalty. It is only the taxable part of a conversion that carries the clock and penalty.

2. The conversion was partially or fully taxable, the 5 years have passed, but the taxpayer is not yet 59.5. Again, the Roth IRA is not yet qualified but there is no penalty.

I'm assuming that a "qualified distribution" must come from a "qualified Roth IRA". If it is possible to have a qualified distribution from a Roth IRA that is not yet qualified, then my terminology is incorrect, but I feel confident the penalty part is correct.

Perhaps Alan will comment.
I don't understand your fully taxable qualification. The conversion carries no taxes, the taxes are already paid. So even if it's taxable as income, there is no income.

You only look at the penalty.

In order to avoid the penalty, you need an exception. This is where it gets odd as I cannot find the exception for the Roth is five years old, but conversion is less than five years old, but kitces says it exists and I'm not going to spend more time tracking it down (or I'm reading him wrong). Now, one exception is clearly the conversion itself is five years old. The other purported exception is the Roth is over five years old and the conversion age doesn't matter.

https://www.kitces.com/blog/understandi ... nversions/

The CBO says the Roth has it's own five year rule and the IRS publications imply it. I'll try to find the link to the report.

Either way, if you're over 59.5 and the Roth is over 5 years, that's the biggest exception and usually the door everyone goes through. The other is a return of contribution.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Alan S. »

The following is a list of all the Roth IRA penalty exceptions (Pub 590 B, p 30) which will waive the 10% penalty:
Exceptions. You may not have to pay the 10% additional
tax in the following situations.
• You have reached age 591/2.
• You are totally and permanently disabled.
• You are the beneficiary of a deceased IRA owner.
• You use the distribution to buy, build, or rebuild a first
home.
• The distributions are part of a series of substantially
equal payments.
• You have unreimbursed medical expenses that are
more than 7.5% of your adjusted gross income (defined earlier) for the year.
• You are paying medical insurance premiums during a
period of unemployment.
• The distributions aren't more than your qualified
higher education expenses.
• The distribution is due to an IRS levy of the qualified
plan.
• The distribution is a qualified reservist distribution.
Most of these exceptions are discussed earlier in chapter 1 under Early Distributions.
While it was stated that a qualified Roth IRA distribution is not subject to penalty, that is not included on the above list because it would be extraneous. A qualified distribution would not be qualified if the taxpayer was neither 59.5, disabled, or dead, or had held a Roth for 5 years and met the first homebuyer definition, which are the first 4 bullets above.

The first home exception is different from the others. Not only is it limited to 10,000 lifetime per taxpayer, but it requires the Roth to be held 5 years to be income tax free, but not to be penalty free. This exception breeds considerable confusion, once the attention turns from the penalty to the ordinary income tax.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Lee_WSP »

Alan S. wrote: Sat Dec 11, 2021 4:02 pm The following is a list of all the Roth IRA penalty exceptions (Pub 590 B, p 30) which will waive the 10% penalty:
Exceptions. You may not have to pay the 10% additional
tax in the following situations.
• You have reached age 591/2.
• You are totally and permanently disabled.
• You are the beneficiary of a deceased IRA owner.
• You use the distribution to buy, build, or rebuild a first
home.
• The distributions are part of a series of substantially
equal payments.
• You have unreimbursed medical expenses that are
more than 7.5% of your adjusted gross income (defined earlier) for the year.
• You are paying medical insurance premiums during a
period of unemployment.
• The distributions aren't more than your qualified
higher education expenses.
• The distribution is due to an IRS levy of the qualified
plan.
• The distribution is a qualified reservist distribution.
Most of these exceptions are discussed earlier in chapter 1 under Early Distributions.
While it was stated that a qualified Roth IRA distribution is not subject to penalty, that is not included on the above list because it would be extraneous. A qualified distribution would not be qualified if the taxpayer was neither 59.5, disabled, or dead, or had held a Roth for 5 years and met the first homebuyer definition, which are the first 4 bullets above.

The first home exception is different from the others. Not only is it limited to 10,000 lifetime per taxpayer, but it requires the Roth to be held 5 years to be income tax free, but not to be penalty free. This exception breeds considerable confusion, once the attention turns from the penalty to the ordinary income tax.
Right, they're all in the code. The lingering question posed by kitces is when your under 59.5, how do you avoid the penalty, because he he suggests you can.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by MarkNYC »

Alan S. wrote: Sat Dec 11, 2021 4:02 pm The following is a list of all the Roth IRA penalty exceptions (Pub 590 B, p 30) which will waive the 10% penalty:
Exceptions. You may not have to pay the 10% additional
tax in the following situations.
• You have reached age 591/2.
• You are totally and permanently disabled.
• You are the beneficiary of a deceased IRA owner.
• You use the distribution to buy, build, or rebuild a first
home.
• The distributions are part of a series of substantially
equal payments.
• You have unreimbursed medical expenses that are
more than 7.5% of your adjusted gross income (defined earlier) for the year.
• You are paying medical insurance premiums during a
period of unemployment.
• The distributions aren't more than your qualified
higher education expenses.
• The distribution is due to an IRS levy of the qualified
plan.
• The distribution is a qualified reservist distribution.
Most of these exceptions are discussed earlier in chapter 1 under Early Distributions.
While it was stated that a qualified Roth IRA distribution is not subject to penalty, that is not included on the above list because it would be extraneous. A qualified distribution would not be qualified if the taxpayer was neither 59.5, disabled, or dead, or had held a Roth for 5 years and met the first homebuyer definition, which are the first 4 bullets above.

The first home exception is different from the others. Not only is it limited to 10,000 lifetime per taxpayer, but it requires the Roth to be held 5 years to be income tax free, but not to be penalty free. This exception breeds considerable confusion, once the attention turns from the penalty to the ordinary income tax.
Alan - As you know, and should probably be pointed out, the penalty exceptions you list apply to the taxable earnings in any Roth nonqualified distribution. There is a separate 10% penalty that may apply to the nonqualified and nontaxable distribution of Roth conversion amounts unless the 5-year conversion period is met. This penalty exception is explained in 590-B in the section just prior to the penalty exception list you provided.
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

thanks for the extra commentary....

so brings back to my previous questions. :
1: IRR at my previous employer, the contributions i made can be taken out without penalty.
2. The backdoor Roth IRA contributions i made to my own accounts, those have to 5 years wait. I've watched several youtube videos on it and they are saying two things have to happen. The account has to be 5 years old and the contribution has to be 5 years old. so if u put 6k a year in it, by year 5 you can only take out 6k per year.

I"m not planning to take out any gains until i'm 59.5 or somehow i managed to stay on until i'm 55.5. That's 11 years away and to be honest i'm 90% sure that isn't going to happen so i better just focus on 59.5 lol.

My budget during retirement is 120k per year. so my rough guess is i need about 1.2M after tax if we retire in 4 years.. I have about 600k aftertax in brokerage accounts now. we have made 300k in IRR. $52k worth of back door roths. so about 950k. $15k worth of HSA. I have 650k in kids 529 plan. I'm not going to include the 529 because a vast majority of my cost will go towards college for roughly 6 years is already going to be paid for through the 529, i'm not going to include that right now.

So if can do about $250k more in after tax savings from now until 4 years.... roughly 75k a year we should be sitting pretty. If i could muster $120k a year somewhere then i can probably be comfortable to retire in 3 which would be ideal since my RSU would be 100% vested by then. Close enough to taste it :)

thanks for all the input.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by ryman554 »

sidwin516 wrote: Sun Dec 12, 2021 1:29 am 2. The backdoor Roth IRA contributions i made to my own accounts, those have to 5 years wait. I've watched several youtube videos on it and they are saying two things have to happen. The account has to be 5 years old and the contribution has to be 5 years old. so if u put 6k a year in it, by year 5 you can only take out 6k per year.
They have 5 years to wait WITHOUT PENALTY. The penalty is 10% of the taxable amount of the conversion. Basically earnings on the non-deductible amount while in the tIRA.

If you did the contribute to tIRA / convert to ROTH steps in a week or so and stayed in cash... your growth should be something like $0.01, or certainly less than $1. That penalty (<$0.10) rounds down to $0, so while you are penalized, the penalty is $0.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sc9182 »

The other day when I mentioned Roth rules are rather complex (especially conversions, Backdoors, MBR, potential Pro-Rata, record-keeping need, oft mentioned on BH - higher chance of IRS CP2000 notices); I got laughed at by some “two” of the Roth aficionados around here as if - its all easy-peasy. If “experts” are having tough time deciding nuances here, good luck pulling such detail out of a poor Fidelity Rep.

Safer bet is to follow 5 year-rule on just about every Tranche that goes in (know this is not true on every type of monies and corresponding basis that goes in, but “safer bet”).

As an alternate- consider super-low rate “Margin Loan” against your brokerage account towards emergency funding needs., and/or HELOC. Multiple BH’er mentioned negotiated rates about 1%-1.5% on margin, even on sub $1 million brokerage accounts.

Per Prof. McQ recent BH threads — most types of Roth monies are to be best left-alone to compound into your older ages: 80s, 90s or in some cases age 115 to yield best results!! So, almost-never touch Roth monies — allowing longest runway for it to compound — ie., plan to live loong, but don’t touch Roth :-) (Roth monies best left to heirs if they are to be in their highest tax brackets)
Last edited by sc9182 on Sun Dec 12, 2021 8:06 am, edited 1 time in total.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

sidwin516 wrote: Sun Dec 12, 2021 1:29 am so brings back to my previous questions. :
1: IRR at my previous employer, the contributions i made can be taken out without penalty.
Taken from where - the Roth 401k or the Roth IRA? If you withdraw from Roth 401k before age 59.5, there will be both tax and penalty on part of the withdrawal.

2. The backdoor Roth IRA contributions i made to my own accounts, those have to 5 years wait. I've watched several youtube videos on it and they are saying two things have to happen. The account has to be 5 years old and the contribution has to be 5 years old. so if u put 6k a year in it, by year 5 you can only take out 6k per year.
You are going to have to define what you mean by "backdoor Roth IRA contributions". You might be talking about Roth conversions instead. They are not the same thing and what you are reporting from the videos is not necessarily correct for contributions using the backdoor Roth process.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Lee_WSP »

ryman554 wrote: Sun Dec 12, 2021 5:29 am
sidwin516 wrote: Sun Dec 12, 2021 1:29 am 2. The backdoor Roth IRA contributions i made to my own accounts, those have to 5 years wait. I've watched several youtube videos on it and they are saying two things have to happen. The account has to be 5 years old and the contribution has to be 5 years old. so if u put 6k a year in it, by year 5 you can only take out 6k per year.
They have 5 years to wait WITHOUT PENALTY. The penalty is 10% of the taxable amount of the conversion. Basically earnings on the non-deductible amount while in the tIRA.

If you did the contribute to tIRA / convert to ROTH steps in a week or so and stayed in cash... your growth should be something like $0.01, or certainly less than $1. That penalty (<$0.10) rounds down to $0, so while you are penalized, the penalty is $0.
You may be calculating it correctly, but the actual language is
If any taxpayer receives any amount from a qualified retirement plan (as defined in section 4974(c)), the taxpayer’s tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.
And 408 says
Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section 72.
And 408a says
(a)General rule
Except as provided in this section, a Roth IRA shall be treated for purposes of this title in the same manner as an individual retirement plan.
Which would mean distributions are included unless otherwise excluded by statute.

However, we all know there is no tax owed because the tax has already been paid on contributions. However, I am unable to find the statute which spells out how that mechanism works (either it's excludible from gross or deducted). This last part will finish this particular puzzle. If anyone knows which part of the code it's located in, we can wrap at least this part up.
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

retiredjg wrote: Sun Dec 12, 2021 7:53 am
sidwin516 wrote: Sun Dec 12, 2021 1:29 am so brings back to my previous questions. :
1: IRR at my previous employer, the contributions i made can be taken out without penalty.
Taken from where - the Roth 401k or the Roth IRA? If you withdraw from Roth 401k before age 59.5, there will be both tax and penalty on part of the withdrawal.

2. The backdoor Roth IRA contributions i made to my own accounts, those have to 5 years wait. I've watched several youtube videos on it and they are saying two things have to happen. The account has to be 5 years old and the contribution has to be 5 years old. so if u put 6k a year in it, by year 5 you can only take out 6k per year.
You are going to have to define what you mean by "backdoor Roth IRA contributions". You might be talking about Roth conversions instead. They are not the same thing and what you are reporting from the videos is not necessarily correct for contributions using the backdoor Roth process.
sorry for the confusion... I only plan on taking contribution withdrawals not any gains

my in roth conversion from work contribution is $295k. I want to be able to withdraw that if i need to live off of that. I'm assuming that will be tax free and penalty free. Some people said IRR has a 5 year but then i read it doesn't. I have 2 years left so I shouldn't matter much to me one way or another.

My 401k Roth i have contribution of $19k. I'm expecting to take that out if i need it to. I just opened that in 2021. I don't know when i could take that out without penalty.

My personal Roth IRA i have contributions of $20k. This was open in 2018 as well.

So now with all that information, I want to make sure I can get to withdrawal my contributions to not have to pay penalties.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by Lee_WSP »

sidwin516 wrote: Sun Dec 12, 2021 10:29 am
retiredjg wrote: Sun Dec 12, 2021 7:53 am
sidwin516 wrote: Sun Dec 12, 2021 1:29 am so brings back to my previous questions. :
1: IRR at my previous employer, the contributions i made can be taken out without penalty.
Taken from where - the Roth 401k or the Roth IRA? If you withdraw from Roth 401k before age 59.5, there will be both tax and penalty on part of the withdrawal.

2. The backdoor Roth IRA contributions i made to my own accounts, those have to 5 years wait. I've watched several youtube videos on it and they are saying two things have to happen. The account has to be 5 years old and the contribution has to be 5 years old. so if u put 6k a year in it, by year 5 you can only take out 6k per year.
You are going to have to define what you mean by "backdoor Roth IRA contributions". You might be talking about Roth conversions instead. They are not the same thing and what you are reporting from the videos is not necessarily correct for contributions using the backdoor Roth process.
sorry for the confusion... I only plan on taking contribution withdrawals not any gains

my in roth conversion from work contribution is $295k. I want to be able to withdraw that if i need to live off of that. I'm assuming that will be tax free and penalty free. Some people said IRR has a 5 year but then i read it doesn't. I have 2 years left so I shouldn't matter much to me one way or another.

My 401k Roth i have contribution of $19k. I'm expecting to take that out if i need it to. I just opened that in 2021. I don't know when i could take that out without penalty.

My personal Roth IRA i have contributions of $20k. This was open in 2018 as well.

So now with all that information, I want to make sure I can get to withdrawal my contributions to not have to pay penalties.
The biggest and easiest exclusion to get through is being over 59.5 and having a Roth opened for more than 5 years. The second easiest is return of contributions. Then there are other means such as the Roth conversion 5 year rule.
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retiredjg
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

sidwin516 wrote: Sun Dec 12, 2021 10:29 am
retiredjg wrote: Sun Dec 12, 2021 7:53 am
sidwin516 wrote: Sun Dec 12, 2021 1:29 am so brings back to my previous questions. :
1: IRR at my previous employer, the contributions i made can be taken out without penalty.
Taken from where - the Roth 401k or the Roth IRA? If you withdraw from Roth 401k before age 59.5, there will be both tax and penalty on part of the withdrawal.

2. The backdoor Roth IRA contributions i made to my own accounts, those have to 5 years wait. I've watched several youtube videos on it and they are saying two things have to happen. The account has to be 5 years old and the contribution has to be 5 years old. so if u put 6k a year in it, by year 5 you can only take out 6k per year.
You are going to have to define what you mean by "backdoor Roth IRA contributions". You might be talking about Roth conversions instead. They are not the same thing and what you are reporting from the videos is not necessarily correct for contributions using the backdoor Roth process.
sorry for the confusion... I only plan on taking contribution withdrawals not any gains

my in roth conversion from work contribution is $295k. I want to be able to withdraw that if i need to live off of that. I'm assuming that will be tax free and penalty free. Some people said IRR has a 5 year but then i read it doesn't. I have 2 years left so I shouldn't matter much to me one way or another.

My 401k Roth i have contribution of $19k. I'm expecting to take that out if i need it to. I just opened that in 2021. I don't know when i could take that out without penalty.
I'm going to say this a third time, because it appears I am not getting the message across. If this does not work, someone else should try. No offense meant to you at all - we all understand some people better than other people and maybe I'm just not your person. :(

You apparently have a Roth 401k that contains $295k in IRR and $19k in Roth contributions. These are both in Roth 401k although the accounting is separate. They will all be treated the same, so I'll talk like this is just one bucket of money instead of two.

Your $314k has made some earnings or gains in the time the $314k has been sitting in the Roth 401k. Let's say the total earnings are $36k, meaning the Roth 401k is now $350k in size.

If you take all the money out of Roth 401k before age 59.5 and spend it, the MUST give you the entire $350k (although some will be withheld for taxes). They are not allowed to give you just the $314k. And the $36k portion will have both tax and penalty.

If you take out part of the money before age 59.5 and spend it, they MUST give you some of the $314k and some of the $36k. In other words, it will be "pro-rated" between the two amounts. And whatever amount came from the earnings will have both tax and penalty.

The rules are different if you roll the Roth 401k into Roth IRA when you leave employment. In the Roth IRA, you would be allowed to spend just the $314k and leave the $36k until after you are 59.5 years old. You can spend the $36k before 59.5 too if you want, but you will pay both tax and penalty on this part.



My personal Roth IRA i have contributions of $20k. This was open in 2018 as well.
You said this money got into this account by backdoor Roth. Each of these Roth conversions will have a 5 tax year clock if you paid any tax on the Roth conversion. Did you?
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

Ok understood. Move the funds from my 401k (295k) that was IRR to a personal Roth IRA. Then I don’t have to worry about prorata. That should be easily doable since both are held at fidelity currently. The remaining $400k I can decide later if I want to do roth conversions later or roll directly into my current 401k roth at the new job.

I funded each personal Roth IRA by contributing to a regular ira at the beginning of each year with funds from my checking account. Then I proceed with a rollover to the Roth once the funds settle.

Sorry for all the back and forth. I didn’t see the reply stating the personal Roth IRA isn’t subject to prorata while the 401k roth is. I’ll email fidelity now.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

sidwin516 wrote: Sun Dec 12, 2021 11:39 am I funded each personal Roth IRA by contributing to a regular ira at the beginning of each year with funds from my checking account. Then I proceed with a rollover to the Roth once the funds settle.
Did you always convert the exact same amount that you put in? Or were there some earnings before the rollover to Roth IRA occurred?

No problem about the back and forth. This is complicated and you have a lot of moving parts. It's important to get this right.
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

retiredjg wrote: Sun Dec 12, 2021 11:52 am
sidwin516 wrote: Sun Dec 12, 2021 11:39 am I funded each personal Roth IRA by contributing to a regular ira at the beginning of each year with funds from my checking account. Then I proceed with a rollover to the Roth once the funds settle.
Did you always convert the exact same amount that you put in? Or were there some earnings before the rollover to Roth IRA occurred?

No problem about the back and forth. This is complicated and you have a lot of moving parts. It's important to get this right.
I would convert the full amount. Then a few weeks later I would see $1.50 be deposited. Then the following year I will contribute the max in the ira then roll the total amount when it clears. I leave the interest.
Last edited by sidwin516 on Sun Dec 12, 2021 1:15 pm, edited 2 times in total.
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retiredjg
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

What did you do with the $1.50?
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

retiredjg wrote: Sun Dec 12, 2021 1:11 pm What did you do with the $1.50?
It stays in the regular ira acct.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by HomeStretch »

sidwin516 wrote: Fri Dec 03, 2021 9:07 pm … With Fidelity I also have an IRA account that has 0 in it but I use it for all my back door Roth IRA. …
sidwin516 wrote: Sun Dec 12, 2021 1:15 pm
retiredjg wrote: Sun Dec 12, 2021 1:11 pm What did you do with the $1.50?
It stays in the regular ira acct.
OP, in a prior post quoted, above, you said you had a Fidelity IRA account used for your backdoor Roth’s (which I took to mean it is a traditional IRA [TIRA]) with a $0 balance.

Do you have a second TIRA account with this $1.50 of pretax earnings in it? Or did you eventually rollover the $1.50 to your Roth IRA so that your TIRA balance(s) is(are) $0 at 12/31 in any year you do a backdoor Roth to avoid pro-rated taxes on the conversion?

Do you file a Form 8606 with your Federal income tax return for each year you do a backdoor Roth to report the non-deductible TIRA contribution and the Roth conversion?
Last edited by HomeStretch on Sun Dec 12, 2021 1:40 pm, edited 1 time in total.
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by retiredjg »

You should probably go ahead and convert whatever is in there to Roth IRA before the end of this year.

You should have been converting the "following" $1.50 each year and paying taxes on it. I'm not sure if this would have made any difference on your taxes in the long run. It might have rounded to $0 (no difference).
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sidwin516
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Re: no 5 year wait on converted Roth coming from a previous employer 401k?

Post by sidwin516 »

HomeStretch wrote: Sun Dec 12, 2021 1:34 pm
sidwin516 wrote: Fri Dec 03, 2021 9:07 pm … With Fidelity I also have an IRA account that has 0 in it but I use it for all my back door Roth IRA. …
sidwin516 wrote: Sun Dec 12, 2021 1:15 pm
retiredjg wrote: Sun Dec 12, 2021 1:11 pm What did you do with the $1.50?
It stays in the regular ira acct.
OP, in a prior post quoted, above, you said you had a Fidelity IRA account used for your backdoor Roth’s (which I took to mean it is a traditional IRA [TIRA]) with a $0 balance.

Do you have a second TIRA account with this $1.50 of pretax earnings in it? Or did you eventually rollover the $1.50 to your Roth IRA so that your TIRA balance(s) is(are) $0 at 12/31 in any year you do a backdoor Roth to avoid pro-rated taxes on the conversion?

Do you file a Form 8606 with your Federal income tax return for each year you do a backdoor Roth to report the non-deductible TIRA contribution and the Roth conversion?
Yes I submit 8606 every year. I only have one traditional ira. I use that to do my back door every year. So it keeps a balance i just checked .02. Lol
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