Roth IRA and 401K question

[Russ Smith]

I just came across this but I'm having a hard time getting a concrete answer AI is not agreeing with itself and neither are links.

I am past 59 1/2 so I used one of my IRA's this year and paid the income tax on it on withdrawal no problem confirmed with Vanguard I was doing it correctly so no penalty.

The other part of that, from an old employer, was in a Roth 401K which I convered to a Roth IRA to get more investment options at Vanguards recommendation. I don't need to use it probably until next year but when I was looking at it today I realized the option to sell for cash was different. Does the 5 year rule start over because I converted it from Roth 401K to Roth IRA or does the 5 years carry over from when I first opened the Roth 401K, or did it start over? If it started over I'm a bit miffed with Vanguard as that wasn't explained to me. it appears I converted in June 2023. Near as I can tell if it does NOT qualify for the 5 year rule I can only take out the money I originally deposited, in June of 2023 when I converted it not any money I made since then. I can but I would have to pay income tax on the money earned since then?

 

[oaken1]

I just came across this but I'm having a hard time getting a concrete answer AI is not agreeing with itself and neither are links.

I am past 59 1/2 so I used one of my IRA's this year and paid the income tax on it on withdrawal no problem confirmed with Vanguard I was doing it correctly so no penalty.

The other part of that, from an old employer, was in a Roth 401K which I convered to a Roth IRA to get more investment options at Vanguards recommendation. I don't need to use it probably until next year but when I was looking at it today I realized the option to sell for cash was different. Does the 5 year rule start over because I converted it from Roth 401K to Roth IRA or does the 5 years carry over from when I first opened the Roth 401K, or did it start over? If it started over I'm a bit miffed with Vanguard as that wasn't explained to me. it appears I converted in June 2023. Near as I can tell if it does NOT qualify for the 5 year rule I can only take out the money I originally deposited, in June of 2023 when I converted it not any money I made since then. I can but I would have to pay income tax on the money earned since then?

I'm confused. A Roth is post tax , so you should only pay taxes on any dividend earned.
A 401k is pretty tax, so you have to pay income taxes on the initial deposits as well as the dividend...

I am unfamiliar with a Roth 401k...seems an oxymoron

 

[Folster]

I just came across this but I'm having a hard time getting a concrete answer AI is not agreeing with itself and neither are links.

I am past 59 1/2 so I used one of my IRA's this year and paid the income tax on it on withdrawal no problem confirmed with Vanguard I was doing it correctly so no penalty.

The other part of that, from an old employer, was in a Roth 401K which I convered to a Roth IRA to get more investment options at Vanguards recommendation. I don't need to use it probably until next year but when I was looking at it today I realized the option to sell for cash was different. Does the 5 year rule start over because I converted it from Roth 401K to Roth IRA or does the 5 years carry over from when I first opened the Roth 401K, or did it start over? If it started over I'm a bit miffed with Vanguard as that wasn't explained to me. it appears I converted in June 2023. Near as I can tell if it does NOT qualify for the 5 year rule I can only take out the money I originally deposited, in June of 2023 when I converted it not any money I made since then. I can but I would have to pay income tax on the money earned since then?

One point of confusion is the terminology. Roth 401K to Roth IRA is a rollover and not a conversion.

As near as I can tell, the important factor to consider is when you opened and funded the Roth IRA keeping in mind that the IRS considers all of your Roth IRAs to be one regardless of how many you have or where they are held.

I found this from investopedia which seems to explain it in the simplest of terms.

Know the Rules for Roth 401(k) Rollovers https://share.google/ruiJGsowJ0fJYKw9o

"Funds rolled from a Roth 401(k) into an existing Roth IRA that meets the five-year holding period inherit the Roth IRA's five-year clock. However, this is not true if funds from a Roth 401(k) are rolled over to a new Roth IRA."

So if the receiving Roth IRA was new and your only Roth IRA, then you reset your 5 year clock when you completed the Roth 401K rollover. If it was pre-existing, then the funds you rolled over inherit the Roth IRAs, pre-existing holding period.

Obligatory: I am not a tax advisor, so please consult a qualified tax advisor.

 

[Russ Smith]

Nice thanks that would mean I might not

One point of confusion is the terminology. Roth 401K to Roth IRA is a rollover and not a conversion.

As near as I can tell, the important factor to consider is when you opened and funded the Roth IRA keeping in mind that the IRS considers all of your Roth IRAs to be one regardless of how many you have or where they are held.

I found this from investopedia which seems to explain it in the simplest of terms.

Know the Rules for Roth 401(k) Rollovers https://share.google/ruiJGsowJ0fJYKw9o


So if the receiving Roth IRA was new and your only Roth IRA, then you reset your 5 year clock when you completed the Roth 401K rollover. If it was pre-existing, then the funds you rolled over inherit the Roth IRAs, pre-existing holding period.

Obligatory: I am not a tax advisor, so please consult a qualified tax advisor.

Thanks I found that this morning too but I'm going to call Vanguard to confirm as I can't find any statement in my account that shows when I opened the original Roth 401K. I know when it was it was when On Semi bought us out and we officially became employees, we were allowed to sign up for their stuff and roll in things and I signed up for a Roth 401K, I just can't find it in the statements.

thanks

 

[Russ Smith]

I'm confused. A Roth is post tax , so you should only pay taxes on any dividend earned.
A 401k is pretty tax, so you have to pay income taxes on the initial deposits as well as the dividend...

I am unfamiliar with a Roth 401k...seems an oxymoron

There are both Roth 401K and Roth IRA

 

[Russ Smith]

So took an hour and 3 different people but Vanguard is saying the 5 years is from when I rolled it over NOT the original Roth 401K and that means they should have told me that upfront I would not have rolled it over in 2023.

not a huge deal I don't need that money now but it means I can't take it tax and penalty free until July of 2028.

Really weird none of the prior account shows in my documents in my account they said because it's old it's no longer there where I can see. I had to log in via 3 different browsers to confirm that but it's true. then they said they can't email me a statement, and they can only mail it to the address that was in the system when I rolled it over, which is my old address so I have to hope the forwarding goes through. The numbers he gave me on the phone do NOT add up the amount in the accounts so without the statement to be clear it's confusing. In theory I can withdraw the amount I contributed now, no tax no penalty but the only way to know what that amount is would be from the statement I'm asking them to send me. Not in my taxes because it wasn't a taxable event.

I moved the money yesterday into a cash only account no stocks which is what started this whole thing I realized there was something different from the standard IRA I already withdrew from(because I am 59.5) so that got me wondering and I found all this out.

 

[Devilmaycare]

I'm confused. A Roth is post tax , so you should only pay taxes on any dividend earned.
A 401k is pretty tax, so you have to pay income taxes on the initial deposits as well as the dividend...

I am unfamiliar with a Roth 401k...seems an oxymoron

There are Roth 401k accounts now where the money goes in post tax like it does with a Roth IRA and then you're not taxed on the gains. Basically a Roth IRA but in 401k form to keep it simple. I've been using one for the last few years now since we started offering it with my plan.

 

[Russ Smith]

There are Roth 401k accounts now where the money goes in post tax like it does with a Roth IRA and then you're not taxed on the gains. Basically a Roth IRA but in 401k form to keep it simple. I've been using one for the last few years now since we started offering it with my plan.

Yeah that's what I had but the investment options were limited so I rolled it into a Roth IRA to get more options which turns out to have been a mistake.

 

[Folster]

There are Roth 401k accounts now where the money goes in post tax like it does with a Roth IRA and then you're not taxed on the gains. Basically a Roth IRA but in 401k form to keep it simple. I've been using one for the last few years now since we started offering it with my plan.

The one issue I have seen with Roth 401Ks is that it seems the contribution basis is not passed on to the Roth IRA if you roll it over. It's not an issue if you are over 59.5 or 5 years, but it makes it more difficult for those trying use basis for a premature distribution. You have to keep track of it.