|Q & A from a former practicing ERISA attorney
Welcome to our new question and answer feature. Periodically we will be posting a Q&A segment that will feature plan sponsor questions by former practicing ERISA attorney Joel Shapiro.
Q: When does the five-year clock start for Roth withdrawls?
A: For most investors, it’s important to know that there is a five-year waiting period for tax-free withdrawals of earnings, and it is applied differently, depending on if you made Roth IRA contributions, converted a traditional IRA to a Roth, rolled over Roth 401(k) assets or inherited the Roth account.
The five-year clock starts with your first contribution to any Roth IRA-not necessarily the one from which you are withdrawing funds. The clock rule also applies to conversions from a traditional IRA to a Roth IRA. (Rollovers from one Roth IRA to another do not reset the five-year clock.) Once you satisfy the five-year requirement for a single Roth IRA, you’re done. Any subsequent Roth IRA is considered held for five years.
If you have a Roth 401(k), those have their own clock (Treasury Regulation 1.402A-1, Q&A-4(b)). If you open a new 401(k) with a new employer, that Roth 401(k) has its own clock. If you move an older 401(k) to a newer 401(k) with a new employer, the old clock is the one that counts. In other words, I would keep the Roth money from a 401(k) plan separate from other ROTH IRAs to avoid issues over whether the five-year clock has expired.
About Joel Shiparo, JD. LLM
As a former practicing ERISA attorney Joel works to ensure that plan sponsors stay fully informed on all legislative and regulatory matters. Joel earned his Bachelor of Arts from Tufts University and his Juris Doctor from Washington College of Law at the American University.
Founded in the 1950s, Carroll Consultants, Ltd. provides investment advisory, retirement plan consulting and administration services to clients throughout the country. For further information about this article, please contact Marcie Carroll at firstname.lastname@example.org or (610) 225-1210.