3782 / How is the five-year holding period of qualified distributions from designated Roth 401(k) or 403(b) accounts determined?

A Roth contribution is deemed to be made on the first day of the first taxable year for which the employee first made any designated Roth contributions. Thus, for a calendar year plan, all contributions in the first year would be deemed made on January 1 of that year. Starting with that date, the five-year period ends at the end of the fifth consecutive taxable year following that date. The beginning of the five-year period for a designated Roth account does not change even if the employee receives a distribution of the entire account during the five-year holding period and subsequently makes additional designated Roth contributions under the plan.

If an employee makes deferrals to designated Roth accounts under more than one plan, the employee will have two or more separate five-year periods of participation that are calculated independently of one another unless the employee makes a direct rollover of a Roth distribution from one plan to another plan.¹ If a direct rollover occurs, the five-year holding period for the receiving plan is deemed to begin on the earlier of beginning of the five-year holding period for the distributing plan or the beginning of the five-year holding period for the receiving plan. This calculation differs from the five-year period calculation under a Roth IRA in which the five year period starts with the date a Roth contribution was made to any Roth IRA ( Q 3673).

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Planning Point: A client planning to make deferrals to a designated Roth account for the next year should begin deferrals in the current year. This will begin the five-year period one year earlier, so qualified distributions can be made one year earlier.

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