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Roth 401(k) plans have been around for a while now, but here’s something you want to keep in mind about these accounts. When you leave your employer, generally speaking, you should always rollover your Roth 401(k) to a Roth IRA. There may be a few exceptions, but that’s the general advice.
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 72, just like traditional 401(k) and IRA plans. Therefore, at some point before age 72 (often 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 (such as 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.
Sterling Raskie, MSFS, CFP®, ChFC®
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And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.
I saw this debated on a CPA message board. The messages concluded that the Roth 401k has its own 5-year period to meet, and the Roth IRA rolled to will have a new separate 5-year period to meet, for all distributions from the Roth IRA to be tax-free after 59.5. One commentator noted that the amount rolled from the Roth 401k to the Roth IRA could be distributed tax-free from the Roth IRA if age 59.5 and the 5-years in the Roth 401k was met, but gains within the Roth IRA would have to wait 5 additional years (from the Roth IRA start date) for tax-free distribution to occur.
That’s how I would interpret the rules as well.
Is this true if there are multiple Roth IRAs? Assume I have one Roth IRA that has satisfied the 5 year clock and assume that my Roth 401k has satisfied its own 5 year clock. When I turn 59 1/2, I establish a new Roth IRA and roll over my Roth 401k. Can I withdraw the total amount rolled over (contribution and gains) from Roth 401k as well as any gains incurred in the new Roth IRA tax-free or do I have to wait additional 5 years to withdraw any gains incurred in Roth IRA?
If none of the rollover from the designated Roth account was taxable upon the rollover, it doesn’t matter. If you paid tax on a portion of the rollover then the rollover will have its own 5-year clock, affecting only the taxable portion of the rollover.