There are some little-known regulations that come into play when rolling over an account from a 401(k) or a 403(b) plan to a Roth IRA. Thus, prior to doing so, it is important to understand these quirky rules, the options available, and the rollover process itself.
Contributions may be made on an after-tax basis to Roth accounts in both Roth IRAs and many retirement plans. Once the five-year holding period is satisfied for such accounts, all amounts may be withdrawn tax-free, including the investment earnings. However, should the decision be made to rollover these Roth accounts, the following points should be noted:
- 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 too 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 The minimum required distribution rules do not apply to Roth IRAs and 100 percent of any after-tax amounts may be withdrawn first from a Roth IRA.
