Rolling Over a Plan Account to a Roth IRA—A Few Quirky Rules

There are some little known rules that come into play when rolling over an account from a 401(k) or a 403(b) plan to a Roth IRA. Contributions may be made on an after-tax basis to Roth accounts in both retirement plans and IRAs. Once the five-year holding period is satisfied for such accounts, all amounts may be withdrawn tax-free, including the investment earnings.

Note the following:

• Roth accounts in retirement plans may be rolled over to another retirement plan or to a Roth IRA. However, this can be accomplished only through a direct trustee-to-trustee rollover. If a plan participant takes a distribution from a Roth account in a plan, then only the investment earnings may be rolled over to another plan or an IRA within 60 days.
• If a Roth account is rolled over from a retirement plan to a Roth IRA, the five-year holding period is calculated from the date of the first contribution to the IRA. Thus, if an IRA is established to accept a rollover from a retirement plan, the five-year holding period begins anew. On the other hand, where an individual has not satisfied the holding period in a retirement plan, it is possible to step up this period by rolling over to an existing Roth IRA.
• There are two distinct advantages to rolling from a retirement plan to a Roth IRA. The minimum required distribution rules do not apply to Roth IRAs and 100 percent of any after-tax amounts may be withdrawn first from a Roth IRA.

Another distinct feature of Roth IRAs is that the decision to re-characterize a traditional IRA as a Roth may be reversed. This must be done before the due date for filing the IRA holder’s tax return for the year in which the IRA was re-characterized. This option is not available for in-plan Roth conversions.

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