Note that the five-year rule applies equally to Roth conversions for both pre-tax and after-tax funds in a traditional IRA. That means, if you're using the backdoor Roth IRA strategy every year, your "Roth contributions" are really conversions, and you can't withdraw them for five years without penalty.
One set of 5-year rules applies to Roth IRAs, dictating a waiting period before earnings or converted funds can be withdrawn from the account. To withdraw earnings from a Roth IRA without owing taxes or penalties, you must be at least 59½ years old and have held the account for at least five tax years.
So to answer your first question, yes, it could make sense to open a Roth IRA at least five years before you plan to rollover your Roth 401(k). However, it's not enough to open it. You have to make a contribution for the five-year time period to start. The problem is that not everyone is eligible to do so.
What is the waiting period before I can withdraw rollover funds penalty-free from my Roth IRA? You will be subject to a 10% early withdrawal penalty if you do not wait 5 years from the rollover.
The first five-year rule states that you must wait five years after your first contribution to a Roth IRA to withdraw your earnings tax free. ... That means that even if you're over 59 1/2 when you withdraw, some of your withdrawal could get included in taxable income thanks to this five-year rule.
You can move money from one Roth IRA to another with either a transfer or a rollover. ... All you have to do is tell your bank where to move the money, and you're done. With a rollover, you take a withdrawal from the Roth IRA and then, no more than 60 days later, you redeposit it in your other Roth IRA.
Digging into the 5-year rule
One of the key benefits of a Roth IRA or Roth 401(k) is that, while contributions aren't tax-deductible, both contributions and earnings can be withdrawn tax and penalty free once you reach age 59½. ... If you roll your Roth 401(k) into your Roth IRA, there's no problem.
Fortunately, the definitive answer is “yes.” You can roll your existing 401(k) into a Roth IRA instead of a traditional IRA. ... Whenever you leave your job, you have a decision to make with your 401k plan.
Under current law, you cannot transfer Roth IRA assets into a Roth 401(k) or Roth 403b. The benefits of doing so might be limited anyway, with the ability to take loans being the primary potential advantage of that strategy. Likewise, after-tax assets in an IRA are problematic if you want to move funds to your 401(k).
If you start a Roth IRA with a conversion and earn a lot of investment gains and then decide to empty the account within five years of setting up your first Roth IRA, you will not owe ordinary income taxes on the converted money because you already paid those in the conversion.
The IRS requires any conversion to have occurred at least five years before you access the money. “If you have not kept assets in your Roth IRA for five or more years, you may be charged taxes and/or penalties on withdrawals,” says Keihn.
The pro-rata rule dictates that when an IRA contains both nondeductible and deductible funds, each dollar withdrawn (or converted) from the IRA will contain a percentage of tax-free and taxable funds.
If you have a Roth 401(k) or 403(b), you can roll over your money into a Roth IRA, tax-free.
Under the pro-rata rule, once you roll over after-tax QRP assets to a Traditional IRA, you must keep a separate accounting for these amounts on IRS form 8606, which will represent basis in your Traditional IRA. ... Then, divide this amount by the 12/31 balance of all your Traditional IRAs combined.
IRA one-rollover-per-year rule
You generally cannot make more than one rollover from the same IRA within a 1-year period. You also cannot make a rollover during this 1-year period from the IRA to which the distribution was rolled over.
There is no limit on rollover amounts whether to a Roth IRA or Traditional IRA assuming they are to like accounts (Roth 401(k) to Roth IRA or Traditional 401(k) to Traditional IRA). There are ways to do a “back door” Roth IRA contribution to avoid the limitation on income.
You can have multiple traditional and Roth IRAs, but your total cash contributions can't exceed the annual maximum, and your investment options may be limited by the IRS.
Practically speaking, a Roth IRA rollover is very simple to complete. Common practice is to simply contact the administrator for your current retirement account and request a rollover to a Roth account (either at the same or another institution).
Yes, the deadline is December 31 of the current year. A conversion of after-tax amounts is not included in gross income.
What Now? Of course, Build Back Better didn't pass in 2021. That means that it's perfectly legal to go ahead with backdoor Roth contributions for 2022, too.
A Roth conversion ladder works by converting money from a 401k to a Traditional IRA to a Roth IRA, and withdrawing the principal amount after five years without any penalties.
Calculating a Roth basis is simple. Add up all of the contributions you have made to date and subtract any contributed funds you have withdrawn in the past.
One way to avoid the pro-rata rule
So if you move your IRA into your 401(k), then complete the “backdoor” transaction, the only IRA money you would have in this example would be the $5k after-tax IRA, so you won't pay any taxes on the conversion since 0% of your total IRA money is pre-tax.
In 2021, single taxpayers can't save in one if their income exceeds $140,000. ... High-income individuals can skirt the income limits via a “backdoor” contribution. Investors who save in a traditional, pre-tax IRA can convert that money to Roth; they pay tax on the conversion, but shield earnings from future tax.
The year you do a Roth conversion, your taxable income will rise, which could cause a portion of your Social Security benefit to be taxed or push you into a situation where more of your benefit is taxed.