facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Deciphering the Rules for Roth 401(k)-to-Roth IRA Rollovers  Thumbnail

Deciphering the Rules for Roth 401(k)-to-Roth IRA Rollovers

More and more 401(k) plans are making Roth employee contributions available, and employees leaving their jobs often want to roll over Roth 401(k) funds to a Roth IRA. What tax rules apply to distributions of amounts rolled over? Warning: The rules are complicated because they involve two five-year holding periods, one for the Roth 401(k) distribution and the other for the Roth IRA distribution.

Deciphering the Rules for Roth 401(k)-to-Roth IRA Rollovers

If Your Roth 401(k) Distribution Is Qualified

Step one is to figure out if your Roth 401(k) distribution is qualified; that is, if you are age 59½ or older (or disabled) and have satisfied a five-year holding period. The holding period begins on January 1 of the year you made your first Roth contribution to the current plan (or did a rollover of Roth funds into the plan or an in-plan Roth conversion). Roth contributions made to other plans (or IRAs) don’t count.

If your Roth 401(k) distribution is qualified, you can immediately withdraw tax-free the entire rolled-over amount (both the Roth 401(k) contributions themselves and associated earnings) from your Roth IRA. What about earnings generated after the rollover? You can’t withdraw those earnings tax-free until the five-year holding period for your Roth IRA has been satisfied. The Roth IRA clock begins on January 1 of the year you made your first contribution (or conversion) to any Roth IRA. (That’s why it’s so important to make a Roth IRA contribution – no matter how small – as early as possible to get the clock ticking.) Importantly, you cannot carry over the Roth 401(k) holding period and use itto satisfy the Roth IRA holding period. But if your Roth IRA is distributed after the Roth IRA holding period has been met, then you’re all set: Everything comes out tax-free and penalty-free.

If the Roth IRA holding period hasn’t been met (because, for example, the rollover is your first Roth IRA), then you have to wait out five years before withdrawing your post-rollover earnings free of taxes. But, again, the original amount rolled over can always be withdrawn without tax or penalty.

If Your Roth 401(k) Distribution Is Not Qualified

What if your Roth 401(k) distribution is not qualified? In that case, you can immediately withdraw tax-free only the rolled-over Roth 401(k) contributions from your Roth IRA. Both the rolled-over Roth 401(k) earnings and any post-rollover earnings come out tax-free only if the Roth IRA distribution is qualified; that is, you’re age 59½ or older (or disabled or using the funds for first-time homebuyer expenses) and you’ve satisfied the Roth IRA five-year holding period (discussed above).

If the Roth IRA distribution is not qualified, then you’ll pay taxes (and possibly the 10% early distribution penalty) on both the rolled-over earnings and post-rollover earnings out of the Roth IRA. But the rolled-over Roth 401(k) contributions can always be distributed free of taxes and penalty.

By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC

Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.

Copyright © 2025, Ed Slott and Company, LLC Reprinted from The Slott Report, 03/03/25, with permission. https://irahelp.com/slottreport/deciphering-the-rules-for-roth-401k-to-roth-ira-rollovers/, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. 
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment advisor. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.