Roth 5-Year Rules and the Tax Planning Window: EDU #2513

Chris’s Summary
Jim and I continue our review of interesting and sometimes confusing retirement planning facts, mostly drawn from Jim’s recent Ed Slott conference. We focus on the two Roth five-year rules and how they apply to Roth IRAs versus Roth 401(k)s. I explain the key distinctions between tax-free earnings and penalty-free access. Jim goes further into how “seasoning” from a Roth 401(k) carries over to a Roth IRA. We also touch on pro rata distribution rules in Roth 401(k)s, the IRS’s strict interpretation of the age 55 exemption, and the unique planning window between 59½ and RMD age.

Jim’s “Pithy” Summary
Chris and I continue our “things that make you go hmm” EDU series with more head-scratchers, funny moments, and some planning tips you’ll definitely want to remember. I came back from the recent Ed Slott conference with a pile of notes, and we dig into the most confusing—and most commonly misunderstood—rules surrounding Roth accounts: the dreaded five-year rules. I walk through both of them, explain how they apply to Roth IRAs and Roth 401(k)s, and we talk about the critical difference between tax-free and penalty-free withdrawals. Then we hit what I think is the big “ah-ha!” moment—the idea of “seasoning” Roth 401(k) dollars. Whether you picture that as a cast iron skillet like Chris or a cracked pepper roast like me, the point is: once a Roth 401(k) is fully seasoned, it keeps its flavor—even after being moved into a Roth IRA.

We also touch on a Roth 401(k) rule that surprises many people: how distributions are treated when they’re not qualified. Spoiler—it’s not like a Roth IRA! Plus, we go over a tax court case involving a guy who thought he was exempt from the 10% early withdrawal penalty and got hit with taxes, penalties, and interest anyway. It’s a cautionary tale, and the court’s response had us both shaking our heads.

Finally, we wrap up with some strategic talk about what Ed calls the “donut hole,” which matches what we refer to in the office as the tax planning window—that sweet spot between age 59½ and your RMD age when there are no penalties, no withdrawal restrictions, and total flexibility in how you tap your retirement accounts. If you’re doing any kind of serious tax or retirement planning, understanding this window is critical. Oh—and yes, there are plenty of food metaphors in this one, because I was hungry the whole show. Hope you enjoy!

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