How do waiting periods work on a 401(k) to Roth 401(k) conversion?
When you withdraw monies from a 401(k) plan, pay the taxes, and reinvest the balance into a Roth 401(k), is there a waiting period of five years before the profit is tax free? Also, if you do this yearly, must each conversion amount be held for five years? Or, once the Roth 401(k) is open, is it only one five-year period?
There are two five-year rules regarding Roth IRAs or Roth 410(k)s.
1) You must wait five years from the tax year of your first Roth IRA contribution, and you must be age 59 1/2 or older, before you can withdraw earnings from the account tax-free. This five-year clock begins ticking January 1st of the year you made your first account contribution.
2) If you do a Roth conversion, you must wait five years from January 1st of the year you made the conversion, to avoid a 10% penalty on withdrawals made before age 59 /12.
Once you take the money out of a 401k, you have made a distribution. You can’t convert a traditional 401k to a Roth 401k like the way you do with an IRA. If you want to do the Roth 401k, talk to your HR and make the change. Make sure you’re in the low tax bracket to do the Roth 401k as there’s no tax deduction once you switch it to the Roth even though you will have tax-free income in the future. Best!