May a designated Roth account be rolled to a Roth IRA? Will it satisfy the five-year rule? Rev. 06/05/09; E-mail Alert 2009-8

Upon the occurrence of a triggering event, such as severance from service, a designated Roth account may be rolled into a Roth IRA without regard to the AGI of the individual. The designated Roth account five-year clock will not be carried over to the Roth IRA. Once rolled into the Roth IRA, the designated Roth accounts funds will be considered under the five-year clock of the Roth IRA. Thus, if it is a new Roth IRA, opened with the rollover money, the  five-year clock will start as of the first day of the year in which the Roth IRA is opened.

For example, if an individual made a designated Roth 401(k) contribution in 2006, 2007 and 2008 and then in 2009 rolled it into a brand new Roth IRA, the five-year clock that was started in 2006 would not be carried over into the Roth IRA; instead the Roth IRA would start a new five-year clock in 2009.

Note that if the Roth IRA had been in existence for over five years when the rollover of designated Roth funds was made, then the designated Roth funds would — upon being rolled into the Roth IRA — satisfy the five-year clock under the Roth IRA.  

Bill Grossman, ERPA, QPA

For much more information on designated Roth accounts, click here for information and/or to register for our eSeminar on the many details of the designated Roth account contributions, distributions, rollovers and reporting.