How To Roll Over a Roth 401k

I realize that the Roth 401(k) is a new animal, but here’s something you want to keep in mind about these accounts as you add to the account over your life.  When you leave your employer, generally speaking, you should always rollover your Roth 401(k) to a Roth IRA.

This is primarily due to the Required Minimum Distribution (RMD) requirement that is placed on Roth 401(k) accounts… unlike a Roth IRA, the owner of a Roth 401(k) is required to take minimum distributions (RMDs) beginning at age 70½.  Therefore, as soon as possible (generally upon separation from service) the owner of the Roth 401(k) should rollover the account to a Roth IRA. But see the caution below!!

Roth IRAs do require the beneficiary to take RMDs after the death of the primary owner, but the distributions are tax free, as would be expected.  But otherwise, during the life of the primary owner of the account, there is no RMD required.

A Word of Caution

The Roth 401(k) (and Roth IRA) both require you to have held the account for five years, and a triggering event must have occurred (generally reaching age 59½), before the distribution is qualified and therefore tax-free.  The tricky part is that the time in the Roth 401(k) doesn’t count toward time held in a Roth IRA.

So, if you roll over the Roth 401(k) account before you’ve met the five year requirement, all the time that you’ve held that account is wiped out, and the time you’ve held the Roth IRA is the new holding period.  If you put the funds into a new Roth IRA, you will have to wait another five years before you can take the money out in a qualified fashion.

If you’d held the Roth 401(k) for five years or longer and a triggering event has occurred, rolling the funds over to a Roth IRA (of any age) allows you to withdraw the funds at any time, for any purpose, without tax.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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