What is the best way to rollover my Roth 401(k) into a Roth IRA?
I am 62.5 years old and retired. I have a Roth 401(k) with my former employer that I first contributed to in November, 2014. I also have a Roth IRA that I opened in 2010. I want to rollover the entire balance in my Roth 401(k) to my Roth IRA. The benefits team at my former job tells me that they will create two checks for me. One is non-taxable for the amount of my contributions and the second is taxable for the earnings amount. They said they have to create a check for taxable amount since I've had the Roth 401(k) for less than five years. My Roth IRA is over seven years old, so I'm trying to understand how I can deposit the entire balance of my Roth 401(k) (both checks from my former employer) into my Roth IRA without incurring any taxes.
You won't incur any tax liability. Since your personal Roth IRA has been in existence for more than five years, after you deposit both checks into it from your Roth 401(k), all of your money will be fully available to you with zero taxes. The holding period in the Roth 401(k) immediately changes to the holding period of your Roth IRA by IRS law.
Great question and common issue. I actually had exactly the same thing happen when I switched firms years ago as I also personally contribute to a Roth 401k and received a match. Based on your description, I think what you are describing as your Roth 401k, is the entire account. In reality, in this sort of a situation, you actually have both a Roth IRA portfion and a traditional IRA portion in your 401k (at least this is how it would rollover.) The Roth 401k, i.e. the contribtributions that you made, will transfer over into a Roth IRA. The match that your employer gave you, would have gone into a tax-deffered part of your 401k (since you never paid income tax on the money) and therefore is "pre-tax" dollars. The simplest solution for you is to setup both a Roth IRA and Traditional IRA and roll over your contributions (Roth portion) into the Roth account and the company match (tax-deferred portion) into a traditional account. If you want to convert your IRA into a Roth IRA, you can do that, and there are plenty of calculators online where you can calculate this (or call your financial advisor or one you trust) and they can help you do this.
When money is withdrawn from a Roth account (401K or IRA) the earnings are taxed if the account is less than 5 years old. However, if you roll it over to another Roth account (Roth 401k to Roth IRA in your case) then you should have to pay no taxes.
Tell your benefits department that the amount is being rolled over (and not withdrawn) and have them make the check out to your Roth IRA account (and not to you directly) - they may then be able to cut one check for the entire amount. Check with your Roth IRA custodian how exactly the check should be made out. (It is usually: Custodian FBO Your name + account number)
Check with the firm you have your Roth IRA at and ask for a rollover form. You should be able to rollover your Roth 401(k) directly into your Roth IRA without incurring any penalties or taxes. It will need to be a trustee to trustee transfer and not a distrubution check sent to you for you to then deposit. If you bypass the checks being sent and have the funds transfered then you should not have a taxable check sent to you.
Good luck and hope this helps.