By Jenny Kiffmeyer, J.D – The Retirement Learning Center
Designated Roth Account Rollover and Five-Year Rule
ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with an advisor in Pennsylvania is representative of a common inquiry regarding Designated Roth contributions in a 401(k) plan. The advisor asked, ”My Client participates in a 401(k) plan, has a Designated Roth account and wants to roll over the Designated Roth account to a Roth IRA. Can my client count the time in the 401(k) plan towards the five-year waiting period for the Roth IRA needed for taking qualified distributions?”
Highlights of Discussion
The short answer is, surprisingly, “No.” If your client rolls over his or her 401(k) plan Designated Roth account assets to a Roth IRA, the time spent in the Designated Roth account will not carry over to the Roth IRA (IRS Treasury Regulation § 1.408A–10, Q&A 4).
That means, if your client established his or her first Roth IRA with the rollover of Designated Roth account assets, the five-year period for determining qualified distributions from the Roth IRA would begin that year. In essence, the five-year period for determining qualified distributions in the 401(k) plan is determined separately from the five-year period for determining qualified distributions in the Roth IRA.
It’s another one of those “earlier of” scenarios for the Roth IRA and the five-year period §1.408A–6, Q&A 2. The five-year period for the Roth IRA begins with the earlier of the taxable year in which
- The first Roth IRA contribution (or conversion) is made to any Roth IRA owned by the individual, or
- A rollover contribution of a Designated Roth account is made to a Roth IRA.
The five-year period for determining qualified distributions from a 401(k) plan Designated Roth account is determined separately from the five-year period for determining qualified distributions in a Roth IRA. For that reason, it may be advantageous for investors to make a Roth IRA contribution sooner rather than later in order to put the five-year clock in motion in the Roth IRA.