How to Roll Over a Roth 401(k) to a Roth IRA

Saving through a Roth 401(k) can help you grow a nest egg that you can then tap into in retirement without having to pay taxes. If you leave your job or you’re ready to retire, you may be wondering what to do with the funds in your 401(k). Rolling your Roth 401(k) over to a Roth IRA is just one possibility. But make sure you know how this process works to avoid triggering an IRS tax penalty. A financial advisor can walk you through a rollover if you’re new to it.

How to Roll Over a Roth 401(k) to a Roth IRA

Rolling a Roth 401(k) into a Roth IRA isn’t that different from completing a normal rollover from a 401(k) to an IRA, says Dave Lowell, a certified financial planner (CFP) based in the Salt Lake City area.

“You contact your employer’s 401(k) provider and request a rollover,” Lowell said. “They will then specify how much of the funds are pre-tax and how much are Roth contributions. You then direct them to make the funds transfer payable to the company where you hold your Roth IRA.”

Requesting a direct rollover allows you to avoid tax penalties that may come into play if you were to have your 401(k) plan administrator send you a check directly. In this case, you’d have to redeposit the money into your Roth IRA account within 60 days of the distribution. Your plan administrator would also withhold 20% for taxes. In turn, the direct route makes completing a rollover from one Roth retirement plan to another significantly easier.

How the Five-Year Rule Affects Roth 401(k)s & Roth IRAs

Roth IRAs offer plan participants several tax advantages. Because you’ve already paid taxes on the money in the account, you can withdraw your original contributions at any time without a penalty. When you retire, qualified distributions from a Roth IRA are tax-free as well.

There is one caveat: the five-year rule. This states that in order to minimize or avoid the tax implications associated with a Roth IRA withdrawal, your account must be open and active for at least five years.

While this rule usually holds steadfast, there are some exceptions where even non-qualified distributions can be tax-free. For example, if you become permanently disabled, you can withdraw from your Roth IRA before age 59.5 without a penalty.

The five-year rule also applies to funds held in a Roth 401(k) account. So if you’ve had a Roth 401(k) and a Roth IRA for at least five years and you’ve been actively contributing to both, then the five-year rule shouldn’t be an issue for rollovers. To ensure this goes smoothly, be sure to plan ahead quite a bit.

“If you have an existing Roth IRA that is older than five years, then you can roll over the Roth 401(k) and take a distribution with no problem, assuming you’re 59.5 or older,” Lowell said. “If you open a Roth IRA for the first time in order to receive Roth 401(k) rollover funds, then you must wait five years to take a distribution penalty-free.”

This rule wouldn’t prevent you from withdrawing your original contributions after the rollover is complete. You could hit a snag if you need to tap into the growth portion of your balance, though.

Pros of Roth 401(k) to Roth IRA Rollovers

Something that applies to Roth 401(k) accounts but not Roth IRAs is that beginning at age 73, you must take required minimum distributions (RMDs) from your account. This is similar to a traditional 401(k) or IRA. So if you would rather let your retirement funds grow tax-free until you need them, rolling them into a Roth IRA might be the best move for you since RMDs do not apply to this kind of IRA.

In fact, you can leave rollover funds in a Roth IRA indefinitely if need be. That may be something of interest to you, particularly if you’re looking to maximize the assets you leave for your beneficiaries.

Cons of Rolling Your Roth 401(k) Funds Into a Roth IRA

When it comes to Roth IRAs, the most important thing to keep in mind is the five-year rule. The clock starts ticking when you make your first contribution to your Roth IRA, not when you open the account. So even if you’ve had a Roth IRA for more than five years, you may still have to hold off withdrawals if it took you a few years to start contributing. Any Roth 401(k) contributions you’ve made don’t make any difference about this timeline.

If you need the money and don’t plan to change jobs any time soon, remember that you may be able to get a Roth 401(k) loan from your plan administrator. To clarify, you could borrow up to $50,000 or 50% of your vested account balance, whichever is less, though the loan must be repaid within five years or immediately upon leaving your employer’s service to avoid it being treated as a taxable distribution. Roth IRAs don’t offer this kind of flexibility, so a rollover would eliminate this option.

You should consider the investment options and fees of a Roth IRA before definitively deciding on a rollover. It may be that your Roth 401(k) program offers a better selection of possible investments or charges fewer fees than a Roth IRA would.

Roth IRA Eligibility, Contribution Rules

Roth IRAs were not designed for wealthy savers. In fact, there is an income cap on Roth IRA eligibility. The IRS income rules for Roth IRAs use your adjusted gross income (AGI) as a guide. Your AGI is simply the total of all your taxable income, minus certain qualified deductions such as those for medical expenses and unreimbursed business expenses.

The IRS sets an income eligibility range that tells you whether you can make:

The maximum contribution to a Roth IRA: $6,500 for tax year 2023, $7,500 if you are age 50 or older ($7,000 and $8,000 for 2024).
a partial contribution,
no contribution.

In 2023, the AGI phase-out range for a married couple filing jointly is $218,000 to $228,000 . For a single filer it is $138,000 to $153,000

For 2024, the AGI phase-out range for a married couple filing jointly is $230,000-$240,000. For those filing single, the range is $146,000 to $161,000.

If your income falls below the bottom of the range, you can contribute the full amount to a Roth IRA. If it’s within the range, you are subject to contribution phase-out rules, meaning that you won’t be able to contribute the full amount. If your income is above the top of the phase-out range, IRS rules prohibit you from contributing to a Roth IRA.

Bottom Line

How to Roll Over a Roth 401(k) to a Roth IRA

Rolling your Roth 401(k) assets into a Roth IRA might make sense if you’re switching jobs or retiring and you don’t want to leave your retirement savings behind. However, it’s important to be clear on the five-year rule and how it affects your ability to withdraw funds you roll over. If you’re unsure of whether a rollover is the right option for your long-term financial plans, try talking things over with a financial advisor.

Tips for Managing Your Retirement Accounts

Taking care of your retirement plans on your own is harder than it might seem. Luckily, finding the right financial advisor that fits your needs doesn’t have to be hard. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Check your 401(k) contributions each year to make sure you’re taking full advantage of your employer’s plan when it comes to matching contributions. Run the numbers through our 401(k) calculator annually to make sure you’re contributing enough to reach your target retirement savings goal.