Roth 401(k) to a Roth IRA Rollover: How Does This Work?
Roth 401(k) to Roth IRA Rollover: Key Rules & 5-Year Clock
Rolling funds from a Roth 401(k) into a Roth IRA can be a strategic move, but only when done with a full understanding of timing rules, tax status, and the “5-year clock” requirement. Without proper planning, you could unintentionally create tax complications or lose years of potential tax-free growth.
This guide explains how the rollover process works, when taxes apply, and how the 5-year clock affects your retirement savings.
Defining a Qualified Roth 401(k) Distribution
To determine how a rollover will be treated, first examine whether the Roth 401(k) distribution qualifies under IRS standards. A distribution is considered qualified only if two specific conditions are met: the account holder must be at least age 59½, and the Roth 401(k) must have been held for at least five years. If either condition is missing, the IRS treats the distribution as non-qualified.
When both conditions are satisfied, all funds rolled into the Roth IRA are treated as basis. This means the entire rollover becomes available for immediate, tax-free withdrawal. In this case, the Roth 401(k) is treated similarly to a large after-tax contribution to the Roth IRA. There are no taxes or penalties involved, and access to the rollover funds is unrestricted.
How the Roth IRA 5-Year Clock Applies
Once the funds arrive in the Roth IRA, a separate set of rules applies. The Roth IRA has its own five-year clock that determines when earnings within the account can be withdrawn tax-free. Even if the Roth 401(k) had been open for more than five years, a newly created Roth IRA does not inherit that timeline.
For someone who has never owned a Roth IRA before, the clock starts on January 1 of the year the account is opened—regardless of the rollover date. That means even with a qualified distribution from the Roth 401(k), the account owner must wait five years from that start date before accessing any earnings tax-free. The good news is that the rollover principal remains accessible without penalty or taxes from day one.
Handling a Non-Qualified Distribution
If a person has not reached age 59½ or has held the Roth 401(k) for less than five years, the rollover becomes a non-qualified distribution. In that case, the IRS requires the funds to be separated by type when added to the Roth IRA.
Salary deferrals, or the contributions made to the Roth 401(k), are rolled into the Roth IRA’s contribution bucket. The investment earnings from the Roth 401(k) are placed in the earnings bucket of the Roth IRA. This separation matters because withdrawals from the Roth IRA follow a strict ordering rule: contributions come out first, then conversions, then earnings.
The Roth IRA’s five-year clock controls access to earnings. If the Roth IRA is new, earnings must stay in the account for five years—even if the Roth 401(k) was older. This approach can result in losing any progress made on the 401(k)’s own five-year requirement.
Why the Roth IRA Timeline Takes Priority
Many mistakenly believe that the time spent in a Roth 401(k) counts toward the Roth IRA’s five-year rule. It does not. Once funds leave a Roth 401(k) and enter a Roth IRA, the IRA’s timeline takes full control. This can either work in the account holder’s favor or reset the clock in a way that causes delays.
For example, if someone had a Roth 401(k) for four years but never opened a Roth IRA before, any rollover would be subject to a brand-new five-year waiting period. The earlier timeline from the Roth 401(k) does not carry over.
By contrast, if that same person already owned a Roth IRA opened more than five years ago, the clock from the older Roth IRA overrides the newer Roth 401(k). In this case, the rollover would immediately benefit from tax-free treatment of both contributions and earnings, assuming age 59½ has been reached.
Planning Your Rollover Strategy
Successful rollovers require both timing and recordkeeping. You should first confirm whether your distribution qualifies. Then you must check the age of your existing Roth IRA or consider opening one strategically in advance. Since the IRS clock begins on January 1 of the year the account is funded, even opening and funding a Roth IRA with a small contribution late in the year can help start the clock earlier.
If the Roth IRA is older than the 401(k), there is little downside to rolling over the funds—provided the IRA meets the five-year requirement. But if you’re rolling into a brand-new Roth IRA, understand that the five-year holding period will begin again, potentially delaying access to tax-free earnings.
Key Points to Remember
Before initiating a rollover from Roth 401(k) to Roth IRA, ask the following:
- Does the distribution meet both IRS requirements (age 59½ and five-year rule)?
- Have you had a Roth IRA open for at least five years?
- Are you aware that the Roth IRA’s five-year clock takes control after rollover?
- Do you understand how contributions and earnings are handled separately?
Misunderstanding these rules can result in penalties or unexpected tax bills. Review your account ages and contribution history before completing any transfers.
FAQs
Do I pay tax on a Roth 401(k) rollover to a Roth IRA?
No, qualified rollovers are tax-free when done directly between accounts.
Can I withdraw my rollover contributions anytime?
Yes, rollover contributions become basis in the Roth IRA and are available tax-free.
What if I’m under 59½ when I roll over?
The rollover may be non-qualified. Contributions are still accessible, but earnings may face penalties if withdrawn early.
How do I start the Roth IRA 5-year clock?
Open and fund a Roth IRA. The clock starts on January 1 of that calendar year.
Does the Roth IRA clock reset every time I roll over?
No. The clock begins with your first Roth IRA contribution and continues indefinitely.
Plan With Confidence
Secure your retirement strategy by understanding your rollover options. Schedule a complimentary consultation with a licensed retirement advisor today.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.