Rollovers from Designated Roth Accounts - FAQs
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Here is a snapshot from an FAQ found on the IRS's website with answers to three common questions about rolling over funds in designated Roth accounts.
Q - Can I roll over distributions from a designated Roth account to another employer's designated Roth account or into a Roth IRA?
A - Yes. However, because a distribution from a designated Roth account consists of both pre-tax money (earnings on the Roth contributions) and basis (Roth contributions), it must be rolled over into a designated Roth account in another plan through a direct rollover. If the distribution is made directly to you and then rolled over within 60 days, the basis portion cannot be rolled over to another designated Roth account, but can be rolled over into a Roth IRA.
If only a portion of the distribution is rolled over, the rolled over portion is treated as consisting first of the amount of the distribution that is includible in gross income. Alternatively, you may roll over the taxable portion of the distribution to another plan’s designated Roth account within 60 days of receipt. However, your period of participation under the distributing plan is not carried over to the recipient plan for purposes of measuring the 5-taxable-year period under the recipient plan.
The IRS may waive the 60-day rollover requirement in certain situations if you missed the deadline because of circumstances beyond your control. See FAQs: Waivers of the 60-Day Rollover Requirement.
Q - How is the 5-taxable-year period calculated when I roll over a distribution from a designated Roth account to a Roth IRA?
A - When you roll over a distribution from a designated Roth account to a Roth IRA, the period that the rolled-over funds were in the designated Roth account does not count toward the 5-taxable-year period for determining qualified distributions from the Roth IRA. However, if you had contributed to any Roth IRA in a prior year, the 5-taxable-year period for determining qualified distributions from a Roth IRA is measured from the earlier contribution. So, if the earlier contribution was made more than 5 years ago and you are over 59 ½ a distribution of amounts attributable to a rollover contribution from a designated Roth account would be a qualified distribution from the Roth IRA.
Q - Are there any examples to help explain the rollover rules?
A - Yes, the following examples illustrate the rollover rules.
Bob receives a $14,000 eligible rollover distribution that is not a qualified distribution from Bob’s designated Roth account, consisting of $11,000 of basis and $3,000 of income. Within 60 days of receipt, Bob rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is deemed to consist of $3,000 of income and $4,000 of basis. Because the only portion of the distribution that could be includible in gross income (the income) is rolled over, none of the distribution is includible in Bob’s gross income.
Carrie receives a $12,000 distribution from her designated Roth account that is a qualified distribution attributable to her being disabled. Immediately prior to the distribution, the account consisted of $21,850 of basis (designated Roth contributions) and $1,150 of income. For purposes of determining recovery of basis, the distribution is deemed to consist of $11,400 of basis [$12,000 × 21,850/(1,150 + 21,