401(k) Rollover

Observant1

Most of my 401(k) contributions were pre-tax contributions.
However, I also made some after-tax Roth 401(k) contributions.
I'm considering taking a distribution for the total Roth 401(k) amount as a direct rollover.
I have an existing Roth IRA account that I'd like to utilize for this transaction.
Is using the existing Roth IRA account advisable or should a separate account
be opened/designated for the rollover?
Thank you.

bumine

I think using your existing ROTH IRA is the way to go because of the 5-year rule withdrawal. If you open a new account, you have to wait 5-years before penalty free withdrawal; your existing Roth IRA is likely older, and get you sooner to penalty free withdrawal (if you ever need a withdrawal).

Hope others will comment, but that's my understanding. In my Fidelity Roth 401(k), I like how Fidelity showed "First Roth Contribution Year" and "First year of withdrawal without penalty *" ------ "*" is for 59 1/2 penalty free withdrawal, so if you are over 59 1/2, then it doesn't really matter.

yogibearbull

There are some advantages to putting rollover money in a separate T-IRA (sometimes also called Rollover T-IRA). It can have money from various rollovers. As most of the protections carryover from 401k/403b to such Rollover T-IRAs, this is a clean way of doing things. If rollover money is mixed with contributory/personal money, different rules apply to different portions and the whole T-IRA may be frozen in case trouble arises.

There are no similar protections for Roth IRAs, so you can put after-tax and Roth 401k/403b money into existing Roth IRA.

As Secure 2.0 changed rules for RMDs from Roth 401k/403b (so, RMDs are no longer required), this isn't as urgent an issue as it was before (when Roth IRA didn't require RMDs, but Roth 401k/403b did).

msf

most of the protections carryover from 401k/403b to such Rollover T-IRAs

Unless a debtor files for bankruptcy, rollovers receive no protection under the Bankruptcy Abuse Protection and Consumer Protection Act (BAPCPA). Seems self-evident.

Outside of bankruptcy, federal protections don't carry over to IRAs, including rollover IRAs:

protection is much different outside of bankruptcy. For example, what happens if you (or your dependents) get into a car accident or cause some other damage and have a large judgment against you? First off, the ERISA protection for assets in a qualified plan would still apply. That means any money in a company retirement plan would be safe from collection. However, unlike bankruptcy proceedings, that protection is lost once the monies are distributed out of the plan. This includes rollovers to IRAs.

https://www.irahelp.com/slottreport/creditor-protection-iras

Rollover monies may still receive better protection than contributory funds in IRAs under state law, but that's not "carrying over" the 401k protection. For example:

If you roll over funds from an ERISA account [in California] into an IRA, those funds remain 100% exempt [protected]. This is the case even though the IRA is not fully exempt in California.

https://www.nolo.com/legal-encyclopedia/are-my-retirement-accounts-protected-from-judgment-creditors-california.html

There are no similar protections for [rollover] Roth IRAs
My guess as to where this comes from is the fact that many states afford Roth IRAs less protection than T-IRAs. But this difference in the treatment between traditionals and Roths doesn't care where the money comes from - rollover or contribution.

As far as the BAPCPA is concerned, a rollover is a rollover, whether traditional or Roth:

Because of the unlimited exclusion for qualified retirement plan assets transferred into a rollover IRA, CPAs should always ensure that rolled-over retirement wealth is segregated in a rollover IRA that is distinct from other traditional or Roth IRAs that the debtor may own.

https://www.journalofaccountancy.com/issues/2006/jan/protectretirementassets.html

See also: https://mgoprivatewealth.com/ideas-insights/now-you-know-the-only-difference-between-a-rollover-ira-and-a-contributory-ira-bankruptcy-limits/

If you want a less wonky source, though I'm not fond of citing it, Investopedia says:

For the purposes of BAPCPA, a rollover IRA is a traditional or Roth IRA account that was originally funded through a transfer from a qualified retirement plan.

https://www.investopedia.com/ask/answers/081915/my-ira-protected-bankruptcy.asp

Observant1

Thank you all for the excellent information.
I reside in Washington state which has strong creditor protections for "employee benefit plans."
Here's a snippet from the corresponding state law:

"The right of a person to a pension, annuity, or retirement allowance or disability allowance, or death benefits, or any optional benefit, or any other right accrued or accruing to any citizen of the state of Washington under any employee benefit plan, and any fund created by such a plan or arrangement, shall be exempt from execution, attachment, garnishment, or seizure by or under any legal process whatever."

This law specifically states that employee benefit plans include: IRAs, Roth IRAs, HSAs, 403(b) accounts, etc.
Link

yogibearbull

State protections for IRAs vary widely. WA is among the states with strong protections; my state IL too. But there are some states with poor protections (CA, ME, NE, WY). Do check your own state.
https://www.thetaxadviser.com/content/dam/tta/issues/2014/jan/stateirachart.pdf

Observant1

Thats good advice YBB!

sma3

One suggestion often overlooked is additional "umbrella insurance" for your homeowners and auto policy. $5,000,000 coverage is fairly cheap and will cover a judgement for an automobile accident or something at your house.

Observant1

@sma3,

Thanks for the suggestion!
This reminds me that I should review my umbrella insurance coverage to ensure that it is still adequate.

sma3

Anytime. I am paranoid and have a policy since I got married. As soon as you have any assets ( and anyone with a house qualifies, given most real estate markets now) you could be a target. Doesn't happen very often; I cannot say I have ever heard of an acquaintance loosing their house or retirement plan over a court case (other than divorce) but that is why you buy insurance.

msf

I've never figured out how much umbrella insurance to buy. Two rules of thumb I've heard are:
- Buy as much as you have assets to protect; and
- Buy as much as you can afford.

Neither makes much sense.

The first because a plaintiff can go after your assets plus your insurance. This is unlike insuring for a property loss. With property you know that the most you can lose, say because of a fire, is the total value of the property.

The second doesn't make sense because it's no answer at all.

sma3

Sure a plaintiff can go after anything but these lawyers work on contingency so are likely to take cases they have a chance of winning. I think it would be very unusual to see a judgement of millions of dollars from an auto accident, unless it was also criminal neglect or intentional. Besides you could pull an "OJ" and move ( after the judgement I think) to Florida or Texas where all of the value of your home is exempt. I seem to remember Andy Fastow dodged shareholder suits from Enron that way too. He socked a big chunk into his Houston house.

msf

I believe this is what you're referring to:
https://www.chron.com/business/enron/article/Enron-executives-may-lose-lawsuits-but-not-all-2070656.php

As far as OJ is concerned,

Collections attorneys who have experience know how to use the Florida Uniform Fraudulent Transfer act and other such actions in Florida to attack transfers by a debtor into exempt assets. Such transfers may be reversible in certain circumstances. Furthermore, transfers to a spouse may also be reversible if done to defraud a creditor.

https://whhlaw.com/oj-simpson-really-moving-florida-debt-collection/

IOW, you'd better have your ducks in a row before there's a judgment against you.

With respect to plaintiffs being constrained by contingency lawyers, submitted for your amusement:

Geico must pay $5.2 million to woman who got HPV from sex in man's insured car, court rules

...The woman — identified in court papers only as "M.O." — said that she "engaged in unprotected sexual activities in Insured's vehicle" in November and December 2017 and that he "negligently caused or contributed to" her catching the human papillomavirus (HPV), a common sexually transmitted infection, court papers said.

https://www.nbcnews.com/news/us-news/geico-must-pay-52-million-woman-got-hpv-sex-mans-insured-car-court-rul-rcna32831

Of course this is being appealed. Still this is the type of claim (liability for negligence) that umbrella insurance is designed for, and it illustrates that the amounts and types of claims possible are limited only by a plaintiff's imagination.