Distributions from a Designated Roth Account

On the other hand, if you do a 60-day (again, either qualified or non-qualified) rollover to a new Roth 401k, the age of the new account will apply, even if the funds had been in the old Roth 401k for a significant period of time.  Only the taxable or earnings component will be allowed to rollover in a 60-day rollover, so the age of the account is a moot point.

Rollover to a Roth IRA

For the same situations as in the paragraphs above, but the transfers are to a Roth IRA, no matter what kind of rollover is done, direct (trustee-to-trustee) or 60-day, qualified or non-qualified, the results are the same – the 5-year holding period will be that of the receiving Roth IRA account, no matter how long the funds had been held in the Roth 401k account.  However, each individual conversion or rollover to a Roth IRA has its own 5-year period, separate from the first 5-year period. See the article Two 5-year Rules for Roth IRAs for more details on this nuance. This is a good reason to establish a Roth IRA immediately, to have a vehicle to receive such transfers if the situation arises.

The one wrinkle with rollovers into Roth IRA accounts has to do with taxability of the rolled over funds:  If the distribution is qualified, then all of the funds rolled over are considered basis, and when distributed for any reason the basis is tax-free (no matter the holding period).  If the distribution is non-qualified, the funds retain their original characterization from before the rollover – part is contributions (basis) and part is earnings (taxable until qualified).

Related: Repairs that Increase the Value of Your Property

So you can see some of the great benefits of doing a trustee-to-trustee transfer over the 60-day transfer – especially if the rollover is to be non-qualified.  As always, consult your financial advisor before doing any of these, just to make sure you don’t make a mistake!

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