Can a Public Employee Retirement Check Be Rolled Over Into a Roth IRA?

Many public employees participate in qualified retirement plans, such as a 401(k), 403(b) or 457. When retirement rolls around, you might receive a sizable distribution from your plan. You can roll it into a Roth IRA, but you might face a tax bill.

Retirement Plans

Traditional employer retirement plans can contain money from pre-tax contributions made by the employee and possibly by the employer, plus all the resulting earnings. Some plans also allow an employee to make after-tax contributions to a separate designated Roth account. Thus, your retirement check might include the nondeductible contributions and earnings from the designated Roth account. You can roll the entire distribution into a Roth IRA and include the amount from the traditional account in your taxable income for the year.

Rollover Methods

If your employer literally hands you a distribution check, the Internal Revenue Service gives you 60 days to deposit it into your Roth IRA. The drawback of this method is that your employer must withhold 20 percent of your plan balance. You can take credit for the withheld amount when you next file your taxes. Far better is to arrange for a trustee-to-trustee transfer from your employer plan to your Roth IRA. Under this method, you avoid deadlines and withholding.

Five-Year Rule

You must wait five years after the rollover to remove earnings from the Roth IRA on the portion stemming from the traditional employer plan. An early withdrawal of earnings will result in a 10 percent penalty tax. However, if you had a pre-existing Roth IRA, the five-year period on the portion derived from your designated Roth account begins with the date of your initial contribution to the Roth IRA. Both the traditional and designated Roth accounts in your employer plan require you to begin taking minimum distributions when you reach age 70 1/2. Roth IRAs never require the owner to make withdrawals.

Beneficiaries

Roth IRA beneficiaries normally don’t pay income taxes on the money they inherit. However, any portion that violates the five-year rule must be included in taxable income. There is no 10 percent penalty on this amount. A spouse who inherits a Roth IRA can take ownership of it and avoid distributions. Other beneficiaries must take distributions over a period based on the life expectancy of the oldest beneficiary. However, if you name a charity or some other non-individual as a beneficiary, the trustee must distribute the Roth IRA by the end of the fifth year following the year of your death.