Tip of the Week: Portability of Roth IRAs and Roth 403(b), 401(k) and 457(b) Plans

Editor’s Note: This is an occasional feature in the NTSA Advisor. It is drawn from The Source, a book that covers technical, compliance, administrative and marketing aspects of the 403(b) and 457(b) markets. More information about The Source is available here.

Portability of Roth 403(b), Roth 401(k) and, effective with the addition of a Roth 457(b) option to governmental plans on Jan. 1, 2011 (referred to as “designated Roth accounts”), is extended to eligible rollover distributions from designated Roth accounts to Roth IRAs. Additionally, effective Sept. 27, 2010, eligible rollover distributions from Roth 401(k), Roth 403(b) and Roth 457(b) plans (beginning in 2011) may be rolled over to a designated Roth account within each plan.

As explained in previous chapters, 403(b) plans with the designated Roth accounts will permit tax-free distributions from the Roth portion of the plan if both the holding period (5 years) and the qualifying event (age 59½, death or disability) requirements are met.

It is important to note that Roth 403(b), Roth 401(k) and Roth governmental 457(b) accounts can be rolled over to one another or to a Roth IRA; however, a Roth IRA cannot be rolled into a Roth 403(b), a Roth 457(b) or Roth 401(k) account. Once a Roth 403(b), Roth 401(k) or Roth 457(b) is rolled into a Roth IRA account, the following rules apply.

1. A new 5-year holding period will be applied unless the participant had already established the Roth IRA account. If so, the 5-year holding period applies to the first tax year the already established Roth IRA was funded.
2. After the rollover, Roth IRA rules will apply. This means that subsequent withdrawals will consist of contributions first (without taxes or penalty tax), no required minimum distributions (during the accountholder’s lifetime) will apply, and qualifying events for tax-free distributions include $10,000 for a first time home purchase, attainment of age 59½, death and disability. The hierarchy for distribution coming from a Roth IRA will be maintained by the taxpayer on a Form 8606 and will be first from contributions; second from conversions (including in-plan Roth rollovers (IRRs)); and last from earnings.