🤔 A co-worker told me I should open a Roth IRA before I retire because otherwise my Roth 401(k) will get taxed if I use any of it in five years. Is this true?
Q.: A co-worker told me I should open a Roth IRA before I retire because otherwise my Roth 401 will get taxed if I use any of it in five years. Is that true and if so, how do I do that when my income is too high to open a Roth? I’ve been funding that for 10 years so the amount in there is not minor.A.: Seth, there are a few five-year rules that apply to Roth accounts. I will just touch on two of them today. If your plan is to just let the Roth grow, these rules can be made irrelevant.
It is important to note that the taxes do not apply to contributions and when taking a distribution, the contributions are distributed first. Since contributions were made with after-tax money, those distributions would be received tax-free. What I suspect your co-worker is referring to is that by opening a Roth IRA now, when your Roth 401 is rolled over to a Roth IRA, you will have already started that five-year clock. Again, the contributions come out first so you would still have access to some funds tax-free even if the Roth IRA was your first Roth IRA.
Of course, if you view the RMD as an unnecessary nuisance, it is likely your intent is to let the Roth account grow so rolling it into a Roth IRA subject to the five-year rule on earnings may not matter.
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