Can I roll over a Roth 401k to a Roth IRA and then withdraw penalty free?
I have an after-tax 401(k) with a former employer and an existing Roth IRA. I'd like to rollover the 401(k). Can I then withdraw that money penalty free, like a contribution, since it is also after tax?
Yes, once you have rolled over your Roth 401(k) directly to your Roth IRA, the qualification for penalty free distributions is 59.5 years of age and held the Roth IRA for five years.
You also will eliminate your Required Minimum Distributions (RMDs). Roth IRAs do not have RMDs. Whereas Roth 401(k)s have RMDs once you have stopped working and are 70.5 years of age. Also with traditional IRAs, once again when you turn 70.5 years of age the government wants your tax dollars so badly that they require you to take these funds out of your traditional IRA every year. If you forget or choose not to take these funds out of your traditional IRA, the IRS will impose a 50% penalty.
Also when withdrawing funds from your traditional IRA, the income counts as provisional income, whereas when withdrawing funds from your Roth IRA, the distributions have no Social Security tax. Roth IRA distributions do not count against income thresholds that may cause Social Security benefits to be taxed.
And your heirs will receive your Roth funds tax-free.
The real answer is, it depends. The specifics are a matter of nomenclature, the nature of the contributions, and the treatment of earnings.
If you’re asking if you can roll the entire balance of a 401(k) account consisting of after-tax contributions and, presumably, earnings into a Roth IRA, then distribute 100% of those assets to yourself tax-free, as if they were Roth IRA contributions, the answer is, no, if earnings are involved. “After-tax contributions,” as opposed to contributions to a Designated Roth Account within a 401(k), can be rolled over into a Roth IRA, but any earnings would need to be rolled over into a pre-tax account, like a Traditional IRA, to avoid taxation. The after-tax contributions that are rolled into the Roth IRA could then be distributed to yourself tax-free, similar to contributions made to a Roth IRA. However, the earnings component, if rolled into a pre-tax account, would be taxable upon their eventual distribution from the pre-tax account.
If you’re asking if you can roll the entire balance of a 401(k) consisting of Designated Roth Account contributions and, presumably, earnings into a Roth IRA, then distribute 100% of those assets to yourself tax-free, as if they were Roth IRA contributions, the answer is, it depends. If you are over age 59 ½ and have had the account for more than five years, then the answer is, yes. If you are under age 59 ½ or if you have had the account for less than five years, the answer is, yes, you can distribute the contribution component to yourself tax-free, but, no, you cannot distribute the earnings to yourself tax-free; as the earnings would not be considered a qualified distribution.
If the old 401(k) includes pre-tax contributions, you’ll also have to account for those. The IRS does not allow for after-tax contributions to be isolated and distributed or rolled-over while leaving the pre-tax component behind.
As is always the case, it is best not to run afoul of the IRS. If you contact your old 401(k)’s plan administrator, and the company with whom you established your Roth IRA, they should be able to walk you through the process and direct you on a course of action that might help you avoid any missteps.
ROTH IRA and ROTH 401ks are not exactly the same - I wrote a post on which is better What is the difference between a ROTH IRA and ROTH 401k? Which is Best? Give it a read.
As for being able to pull money out penalty and tax free the entire rollover will not be available to pull out. But the money you contributed will be available to pull out. The contributions will have needed to be in the ROTH for 5 years to avoid a penalty or taxes.
Make sure to review this with your trusted fiduciary financial planner and CPA to make sure you are not missing anything. Also looking at the bigger financial picture- don't ignore what pulling money from your retirement accounts could do to your changes of achieving financial freedom - or retiring securely.
When you roll over a Roth 401k to a Roth IRA, the tax treament remains the same; that is, your contributions can be withdrawn at any time for any reason, tax-free. Your earnings will be tax-free only if you will be at least 59 1/2 in 2017, and the original Roth was opened at least 5 years ago.
Again, income taxes (and 10% penalty if under 59 1/2) would only apply to the earnings portion. For example, if you contributed $40,000 to your Roth 401k which grew to $50,000, you can withdraw $40,000 tax and penalty free. The $10,000 in earnings would be taxed and possibly penalized, unless you're 59 1/2 and the original account (the Roth 401k) is 5 years old.
Rolling over to Roth IRA has no impact on these rules.
Final point: this answer assumes that all funds have been in Roth accounts. Things get more complicated with "after-tax contributions" to traditional 401k accounts that are rolled into Roth accounts.
Even with a rollover from a previous Roth 401(k) account, the IRS rules remain in effect for that receiving Roth IRA. That means after-tax contributions (principal only) can be withdrawn without a penalty, provided the account was open and had an initial contribution 5 years prior.
There would be a 10% penalty for unqualified withdrawals on earnings before age 59 1/2. Remember, the IRS limits you to one conversion per year.