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Many of our clients save money in their company’s Roth 401(k). When they leave their job, they often want to move that money into a Roth IRA. But be careful: the rules for doing this can get tricky because you have to consider two different five-year waiting periods.
Here’s what you need to know about this somewhat complicated savings plan.
Is your Roth 401(k) money “qualified?”
You need to determine whether your Roth 401(k) money is qualified. It’s qualified if:
● You are at least 59½ years old (or are disabled), and
● You had the Roth 401(k) account for at least five years
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The five-year timeframe starts on January 1 of the year you first put money into that specific Roth 401(k).
If your Roth 401(k) money is qualified, you can roll it into a Roth IRA and take it out whenever you want, tax-free. However, any new earnings (money your investments make after the rollover) in the Roth IRA can only be taken out tax-free if the Roth IRA itself has been open for at least five years. This five-year clock for the Roth IRA starts when you first put money into any Roth IRA, not your Roth 401(k).
A comment on Roth 401(k) earnings: You can’t use the time your money was in the Roth 401(k) to count toward the Roth IRA’s five years. So, even if your 401(k) is five years old, a new Roth IRA means you will have to wait five more years for tax-free growth.
The good news is, the original amount you rolled over is always tax-free, even if you haven't met the Roth IRA’s five-year rule yet.
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If your Roth 401(k) is not qualified
If your Roth 401(k) is not qualified because you haven’t had it long enough or you’re not old enough, you can:
● Roll the money into a Roth IRA
● Take out the original 401(k) Roth contributions tax-free at any time
But any earnings, both from the 401(k) and after the rollover, might be taxed and you may have to pay a 10 percent early-withdrawal penalty unless you meet the Roth IRA’s rules (59 ½ or older, or disabled, or first-time homebuyer and you have satisfied the Roth IRA five-year holding period).
Again, the money you originally put into the Roth 401(k) is tax-free. You won’t owe taxes or penalties on that part.
Talk before you make the move
This information can get confusing fast. That’s why it’s wise to talk to a financial professional before moving your Roth 401(k) money. A little advice now can save you a lot of trouble (and taxes) later! I am happy to guide you through the complexities of these rollovers.
© 2025 Irene Zurowski CFP® CRPS®
Financial Advisor
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Securities and advisory services offered through Cetera Advisors LLC, member FINRA, SIPC, a broker/dealer and a registered investment adviser. Cetera is under separate ownership from any other named entity.
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