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Ask the Experts October 17, 2023
How Does a Roth Distribution Into an IRA Affect Subsequent IRA Distributions?
Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.
Reported by PS
Q: I read the recent Ask the Experts column in which you indicated that a Roth 403(b) account could be distributed entirely tax-free once a participant attains age 59 ½ AND owns the Roth account for five years, presuming that the plan allows for such a distribution. If I roll over the Roth distribution to an IRA, does a new five-year clock start on subsequent distributions from the IRA account? And, if I also have pretax money in my 403(b), can I just designate the Roth source for rollover or does the IRS require distribution of the pretax funds as well?
Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:
A: The rollover from a Roth 403(b) could indeed start a new five-year clock in the Roth IRA, which would require the participant to wait another five years before taking a tax-free distribution from the Roth IRA. The only exception would be if the Roth IRA (or any Roth IRA of the participant) were already in existence PRIOR to the rollover, in which case the time that a Roth IRA was in existence would count towards the five-year clock. For example, if a Roth IRA had been in existence for seven years prior to the rollover, there would be no additional waiting period for a tax-free distribution. If a Roth IRA were in existence for two years prior to the rollover, then the five-year clock would be shortened to three years.
As for completing such a rollover when pretax funds are also present in a participant’s 403(b) account, the pretax funds may have no effect on this transaction. Plan terms could permit a rollover to be directed solely from the Roth account, without any required distribution from the pretax funds or any account proration based on pretax funds present. There are rules requiring that a pro-rata portion of pretax and after-tax (including Roth) funds be distributed if a rollover of after-tax funds was desired, but separate accounting of these amounts under the plan (and corresponding plan language) allows for more flexibility.
NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.
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