Two Roth IRAs, one bucket, and a $50,000 ordering rule

Jim, 48, holds a $100,000 Roth IRA at Custodian A, with $50,000 of that account built from contributions. At Custodian B, he has a $300,000 Roth IRA created by converting a traditional IRA, and he has never contributed to it. Pull $10,000 from the Custodian B account, and the IRS treats it as contribution dollars. Jim would have to take $50,000 out of the combined accounts before a single conversion dollar reaches him.

The example comes from an explainer on Ed Slott's IRAHelp site, and the rule it illustrates is aggregation. The IRS sees one big Roth IRA bucket no matter how many accounts a client has or where those accounts sit. The draw order is strict: contributions first, converted dollars next, earnings last. Custodians and account numbers change nothing.

For an advisor, that means a single-account statement will misstate a client's tax-free withdrawal capacity. A conversion-only Roth at one custodian looks like it has no contribution layer to protect early withdrawals. The client's other Roth, at a different custodian, may hold $50,000 of contributions that rank ahead of that conversion balance. The tax arithmetic lives at the household level.

Roth 401(k) plan money follows a different set of mechanics. The Roth portion of the plan holds salary deferrals, in-plan conversions, and earnings, and any distribution is a pro-rata slice of the three. There is no ordering that lets a participant pull contributions ahead of earnings. The plan treats the whole balance as one blended mix.

Age and time are the switches. A Roth 401(k) participant aged 59½ or older who has held the plan for more than five years receives a qualified distribution, and the entire amount is tax- and penalty-free. If that qualified distribution is rolled to a Roth IRA, the full sum lands in the contributions bucket and is immediately available for tax-free withdrawal. For a participant who has not cleared both thresholds, the pro-rata mix is the operative rule.

The rollover is the planning lever. A client close to 59½ with a long-tenured Roth 401(k) may be better off waiting for a qualified distribution before moving the money to a Roth IRA and drawing from the contributions bucket. Taking the same money early means accepting a blended, pro-rata withdrawal. The two products share a premise — after-tax dollars in, eligible earnings out — but the way dollars come out is shaped by different rules.

The aggregation rule also makes consolidation a paperwork exercise rather than a tax event. Moving a contribution-heavy Roth into the same custodian as a conversion Roth does not change the IRS math; the accounts were already one bucket. It does make the basis visible on a single statement. The practical task is building a household ledger of contributions and conversions, then checking the five-year clock on a client's plan money. A screenshot of one Roth account is a fragment. The IRS is assembling the whole file.