Rolling a Roth 401(k)

Thanks to my friend Jim Blankenship, CFP, for his thoughts:

Roth 401(k)s are great retirement savings tools for many individuals. However, there are a couple of rules you may not be aware of concerning these investment vehicles.

When you leave your employer, generally speaking, you should always rollover your Roth 401(k) to a Roth IRA. This is because minimum distributions (RMD) are required from Roth 401(k)s beginning at age 70.5, while RMDs are not required from Roth IRAs.

A Word of Caution

Generally, both Roth 401(k)s and Roth IRAs require you to be 59.5 and have held the account for five years before the distribution is qualified, and therefore, tax-free. However, if you have owned the account for less than five years, the time in the Roth 401(k) doesn’t count toward time held in a Roth IRA.

For example, if you rollover the Roth 401(k) account before you’ve met the five year requirement, all the time you’ve held that account is wiped out, and the five-year holding period starts anew. 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.

Meanwhile, if you’ve held the Roth 401(k) for five years or longer and you reach age 59.5, rolling the funds over to a Roth IRA allows you to withdraw the funds at any time, for any purpose, without tax.