Can I apply the Five-Year Rule to my Roth 401(k)?

I am 62 years old and recently retired. I have an employer sponsored Roth 401(k) that I started to contribute to in 2014. I also have a Roth IRA that was opened in 2010. Can I do a direct rollover of the balance in my Roth 401(k) to my Roth IRA without incurring taxes on the earnings since I contributed to the Roth IRA more than 5 years ago?

401(k), IRAs, Taxes
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May 2017
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I would recommend transferring your Roth 401(k) into your Roth IRA. And no, you would not incur any taxes and the funds would be available immediately since you are 62 years old.

The five year rule applies if you do a Roth conversion before you are 59.5 years of age, is that you have to wait five years or until you are 59.5, whichever comes first, before you can withdraw the principle without tax and penalty. If you are already 59.5 when you make the conversion, you can withdraw the principle immediately but have to wait five years before you withdraw any of the earnings without penalty.

An investor may withdraw his or her contributions to a Roth IRA at any time without tax or penalty. But, that is not the same case for any earnings or interest that you have earned on your Roth IRA investment. In order to withdraw your earnings from a Roth IRA tax and penalty free, not only must you be over 59.5 years old, but your initial contributions must also have been made to your Roth IRA five years before the date when you start withdrawing funds. If you did not start contributing in your Roth IRA five years before your withdrawal, your earnings would not be considered a qualified distribution from your Roth IRA because of its violation of the five year rule.

The five year rule for your Roth IRA earnings starts on January 1st of the year you make your first contribution. That is when your clock starts. Because you can make a Roth IRA contribution up to April 15th of the next year, your five years technically would not have to be five calendar years. The clock for earnings could count as having started on January 1st as long as you designated contributions up until April 15th for the previous tax year.

The clock only starts with regular Roth IRA contributions in the very beginning with the first contribution ever to be placed into the Roth. However, this is not the case with a Roth IRA conversion; the five year rule clock restarts with every conversion with the amount and date it was converted.

Read more: Rebecca Dawson | Investopedia 

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