Five-Year Requirement for Roth 401k/403b

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One of the tests for a qualified distribution is the five-year requirement. If you don't meet this test, you'll have to pay tax on the earnings portion of any distribution that isn't rolled over.

Remember, this is only one of the tests for a qualified distribution. You also have to be over 59½ or disabled.

When the clock starts

The clock starts on your five-year period the first day of the first year for which you make a Roth 401k or 403b contribution. That's true even if you didn't make any contributions until December. For example, if you started to make Roth 401k contributions at any time in 2006, your clock starts on January 1, 2006 and you'll complete your five years at the end of 2010. Beginning January 1, 2011 you can take qualified distributions if you're over 59½ or disabled.

Year-end contribution

Suppose you started your Roth 401k contributions in December and the money didn't actually go into your account until January. (There's often a small time lag between the date of your paycheck and the date the money goes into the account.) No problem: the regulations say this contribution counts for the previous year, because that is the year you had to report the income from that paycheck.

Different accounts, different clocks

In the world of Roth IRAs you have just one five-year clock for all your accounts (except for a special rule that applies to conversions). That isn't true for Roth 401k or 403b accounts. If you start an account with one employer in 2006 and start an account with a different employer in 2008, you have to deal with two different five-year periods. Assuming you're over 59½ or disabled, you can take qualified distributions from the first account beginning in 2011, but you'll have to wait until 2013 to take qualified distributions from the second account.

There's an exception if you roll the first account over to the second account. In this case, the entire account is treated as if it started in the earliest year of either of the two accounts.

Account age doesn't roll over

The age of your Roth 401k or 403b account doesn't transfer to a Roth IRA when you do a rollover. This peculiar rule can work to your advantage or disadvantage.

• Suppose you've had a Roth 401k for just a few years, but you've had a Roth IRA more than five years. In this case, you can satisfy the five-year test for all your money by rolling the Roth 401k to a Roth IRA.
• The reverse situation is more awkward. You might have held your Roth 401k account several years without holding a Roth IRA. When you create a Roth IRA to receive the rollover from the Roth 401k, you'll start a new five-year waiting period before you can take qualified distributions.

For most people this won't be a problem, because you don't have to pay tax on your Roth IRA distributions until you've withdrawn all your basis.

details: Rollovers from Roth 401k Accounts