Question

Roth 401K to Roth IRA Conversion with Subsequent Withdrawal

Forum|Forum|4 years ago
January 28, 2022
1 reply
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I had a Roth 401K (Fidelity) with an employer where I made contributions from 2010 until I left in 2019. In March of 2020, I rolled the entire balance of $500K to a Roth IRA at Fidelity so I could make additional investment selections / trades. Additionally, I have not made any contributions to this account, only the original rollover amount of $500K.

In September 2021, I withdrew $275K to purchase a house. While doing my taxes in Turbo Tax today, I discovered this withdraw may have some serious tax liability implications. Since all of my contributions were made from 2010 to 2019, and I am 60, I thought I was free to withdraw funds without tax implications.

I entered the 1099 I received from Fidelity with the $275,000 distribution, and selected "T" as the Roth distribution code. When I get to the page that is titled "Enter Prior Year Roth IRA Contributions" it ask for me to enter the "net regular contributions for the Roth IRA prior to 2021 remaining in the account". Again, I have not made any "contributions" to the Roth IRA, only the initial rollover amount. Would the $500K rollover amount be considered the "contribution" so that my net regular contribution remaining would be $225K? Thanks for your insight / assistance. David

R

RaifH

No, your contribution amount would not be the entire $500,000 you rolled over from your Roth 401(k) to your Roth IRA. The contributions would be the total of all contributions you made from 2010 to 2019. The contributions are withdrawn first tax-free.

Although you meet the age requirement, the reason the TurboTax system is initially taxing your withdrawal is that Code T. That code is for Roth IRAs that have not been open for five years, which are normally taxable distributions. Since you opened this Roth IRA in 2020, you would still be subject to taxes on any distributions that exceed your contribution amount. If you had any Roth IRA open and made a contribution prior to 2016, not including the 401(k) that your employer had, you would meet the 5-year rule. For the purposes of the five-year rule, the date you started contributing to your Roth 401(k) does not count. It is the date that you first opened and contributed to a Roth IRA.

For more information on distributions from Roth IRAs, please see Publication 590 from the IRS.