How to Convert Rollover Roth 401(k) to Roth IRA

A Roth 401(k) to Roth IRA Rollover is the process of moving funds from an employer’s plan, usually a former employer’s retirement account, into a personal Roth IRA account.

The transfer may be considered for various reasons, but most people do it because they are no longer an employee or will not be one in the future.

How Is the Roth 401(k) to Roth IRA Rollover Done?

A Roth 401(k) account may be converted into a Roth IRA account by one of the following methods:

Direct Rollover or Trustee-to-Trustee Transfer

A direct rollover is the straightforward method for converting a Roth 401(k) to a Roth IRA account. With this method, the funds are transferred directly from one account to another without ever being in your possession. 

You simply discuss the matter with the 401(k) provider for your workplace and request a rollover. The process could involve filling out a few forms that authorize the transaction.

Indirect Rollover

An indirect rollover, also called a 60-day rollover, is done by withdrawing funds from your 401(k) account and distributing the money to you. Afterwards, you have 60 days to either transfer the money to another qualifying retirement plan or open a Roth Individual Retirement Account. 

The taxable component of qualifying rollover payouts is subject to 20% withholding.

What Are the Benefits of Rolling Over Your 401(k) Into an IRA Account?

Here are some of the benefits you can enjoy when rolling over your 401(k) to IRA account:

Withdrawal Flexibility

Prior to your retirement, you could have more freedom in terms of withdrawals from your Roth IRA. Converted Roth IRA balances may also be withdrawn tax-free or penalty-free if certain conditions are satisfied.

You will have more control of your money as you manage it yourself.

Investment Options

You can pick and choose your investments from a wide array of investment options. The Roth IRA must be invested in accordance with IRS rules, but you may invest in almost anything offered by the mutual fund company of your choice.

You may invest in any stock, bond, or other assets with a Roth IRA. You will be able to diversify your retirement portfolio.

Required Minimum Distributions (RMDs)

If you have a Roth IRA, you do not have to take RMDs throughout your lifetime. As a result, unless you’re still employed by the firm, you’ll have to begin drawing withdrawals from your retirement account once you turn 72, including any Roth contributions.

Are There Any Downsides of Rolling Over a Roth 401(k) Into a Roth IRA?

Transferring retirement funds from a Roth 401(k) to a Roth IRA has some drawbacks.


In certain cases, a Roth 401(k) program may charge less in fees than an individual Roth IRA account would. These reduced fees may thus result in a slightly higher overall retirement savings balance.

Contribution Requirement Before Withdrawals

Despite the fact that you’ve maintained a Roth Individual Retirement Account (IRA) for more than five years, you may still be required to delay withdrawals if you just started contributing a few years ago. The 5-year rule will be described in further detail in the next section.

What Is the 5-Year Rule for Roth IRAs?

Roth IRA withdrawals may be subject to a five-year waiting period before they are tax-free. 

This is known as the 5-year rule, which states that you must be at least 59.5 years old and have also held the Roth IRA for at least five tax years in order to be able to withdraw earnings from the account without incurring tax or penalty obligations.

A few things to keep in mind:

1. Roth conversions employ tax years, but the conversion must be completed by December 31 of the current calendar year.

To establish if you are subject to the five-year rule, you must first ascertain whether the money you want to remove contains converted assets and if it does, which year the conversions were completed.

According to IRS ordering regulations, the conversions that are the oldest are the ones withdrawn first. Contributions are taken out initially, then conversions, and finally earnings are taken out of Roth IRAs.

2. You must make the withdrawal at least five tax years after your initial contribution to your Roth IRA to be eligible for a tax-free distribution on or after the day you reach 59.5.

There is a 10% penalty for early withdrawals under the age of 59.5 unless you meet one of the exceptions.

So if you’ve had the Roth IRA account for at least five years, and you’ve been actively contributing to it, then the five-year requirement shouldn’t be a problem.

In the event that it is not the case, wait for at least 5 years from when you made your first contribution before making qualified distributions from the account.

The 5-Year Rule’s Exceptions

There are several exceptions to this rule that allow early distribution of Roth IRAs without incurring a penalty. These include:

If you intend to use it to cover the cost of health insurance premiums.

You can take out money from an IRA– so long as the funds are used solely for medical costs. There is no minimum age for this exception.

If you’re using it to purchase your first home.

If you and your spouse both qualify as first-time homeowners, you may both take $10,000 from your IRAs without incurring the 10% penalty. Within 120 days of receiving the payout, you must utilize it to pay for the eligible purchase and closing charges.

If you are rendered disabled.

If you are disabled to the point where you are unable to work, your distributions from an IRA will not incur a 10% penalty. A physician must certify that your ailment is expected to last an extended period of time.

If you will pay for higher education fee costs.

Tax-free early withdrawals from an IRA used to pay for eligible higher education costs such as textbooks, tuition, or education supplies on your behalf or on behalf of your spouse, as well as on behalf of your children or grandchildren, are exempt from the 10 percent early withdrawal penalty.

For all the other exceptions, you can refer to the IRA early withdrawal penalty exceptions guide.


Making the choice on whether or not to roll over your Roth 401(k) isn’t always an easy process.

For those that may not be as interested in the Roth IRA as they are in their Roth 401(k), you can always split your retirement savings to diversify and make contributions to both accounts.

Consult with a tax expert to assist you in making an educated decision before moving retirement assets.

A Roth 401(k) is a retirement savings plan that allows employees to make contributions on a post-tax basis. Contributions made to a Roth 401(k) are not tax deductible, but earnings grow overtime without being subject to taxation.
A Roth IRA is an individual retirement account (IRA) that permits eligible withdrawals to be made on a tax-free basis without incurring additional tax liability. Roth IRA contributions are not tax-deductible since they are made using after-tax money.
The process of transferring funds from a Roth 401(k) to a Roth IRA is known as a rollover, which can be done through a trustee-to-trustee transfer. Another option is by withdrawing funds from your 401(k) account and redepositing the entire amount into your own Roth IRA account.
The most typical occurrence that triggers eligibility is when a person quits the employ of their previous company. Other possibilities include reaching the age of 59.5, dying, or being disabled.
Early distributions are not subjected to the additional 10% tax if it is used to pay for medical insurance premiums, health care coverage fees, qualified education costs, or for first-time homebuyers.

401(k) Plan | A Complete Beginner's Guide

401(k) Meaning

The 401(k) retirement savings account got its name from the Revenue Act of 1978, where an addition to the Internal Revenue Services (IRS) code was added in section 401(k). Consequently, 401(k) does not stand for anything except for the section of IRS tax code it was created in.

Traditional 401(k) vs Roth 401(k)

There are two types of 401(k) plans: Traditional and Roth 401(k)s. The traditional 401(k), named after the relevant section of the IRS code, has been around since 1978. With this plan, any contributions you make to the 401(k) account will reduce your income taxes for that year and will be taxed when they are withdrawn. Roth 401(k)s, named after former senator William Roth of Delaware, were introduced in 2006. Unlike a traditional 401(k), all contributions are made with after-tax dollars and the funds in the Roth 401(k) account accrue tax free. Typically, employees can take advantage of both plans at the same time, which is recommended among financial advisors to maximize retirement savings. Because of the way the contribution limits work, it is possible to invest different amounts into each account, even year-to-year, so long as the total contribution does not exceed the set limit.

Contributing to Your 401(k) Retirement Plan

Contributing to a 401(k) plan is traditionally done through one’s employer. Typically, the employer will automatically enroll you in a 401(k) that you may contribute to at your discretion. If you are self-employed, you may enroll in a 401(k) plan through an online broker, such as TD Ameritrade. If your employer offers both types of 401(k) accounts, then you will most likely be able to contribute to either or both at your discretion. To reiterate, with a traditional 401(k), making a contribution reduces your income taxes for that year, saving you money in the short term, but the funds will be taxed when they are withdrawn. With a Roth 401(k), your contributions can be made only after taxation, which costs more in the short term, but the funds will be tax free when you withdraw them. Because of this, deciding which plan will benefit you more involves figuring out in what tax bracket you will be when you retire. If you expect to be in a lower tax bracket upon retirement, then a traditional 401(k) may help you more in the long term. You will be able to take advantage of the immediate tax break while your taxes are higher, while minimizing the portion taken out of your withdrawal once you move to a lower tax bracket. On the other hand, a Roth 401(k) may be more advantageous if you expect the opposite to be true. In that case, you can opt to bite the bullet on heavy taxation today, but avoid a higher tax burden if your tax bracket moves up. Check out this article from Forbes to see the IRS tax rate tables for 2020, but remember that they are subject to change. A smart move may be to hedge your bets and divide your contributions between the two types of IRAs. If your employer allows you to add funds to both a traditional and Roth 401(k), then doing so reduces the potential risks of each. In this case, you will also have the ability to decide what proportion of your income goes into each account, meaning that as you near retirement and have a clearer idea of what position you will be in, you can put more into one or the other. When you do decide which avenue to take, make sure to thoroughly evaluate your decision. Moving funds from one account to another, such as from a traditional to a Roth 401(k), is time consuming and expensive, if even possible. Likewise, transferring a 401(k) from one employer to another in the event of a job change is also tricky. You want to make sure that when you put money into your plan, it will be able to sit undisturbed for a very long time.

Pension vs 401(k)

Pensions are similar to a 401(k), but are a liability to a company. If an employer offers an employee a pension, it means that they are promising to pay out a set amount of money to the employee at the time of their retirement. There is typically no option to grow this amount, but it also does not require any financial investment from the employee. Pensions, also referred to as defined-benefit plans, are becoming increasingly rare because it puts the financial burden of offering a retirement fund for employees entirely on the employer. 401(k)s, which are also called defined-contribution plans, take some of the financial pressure off of an employer, while also allowing employees to potentially earn a larger retirement package than they would have with a pension.

How Much Should I Contribute to My 401(k)?

Most financial experts say you should contribute around 10%-15% of your monthly gross income to a retirement savings account, including but not limited to a 401(k). There are limits on how much you can contribute to it that are outlined in detail below. There are two methods of contributing funds to your 401(k). The main way of adding new funds to your account is to contribute a portion of your own income directly. This is usually done through automatic payroll withholding (i.e. the amount that you wish to contribute, counting all adjustments for taxation, is simply withheld when receiving payment and automatically put into a 401(k)). The system mandates that the majority of direct financial contributions will come from your own pocket. It is essential that, when making contributions, you consider the trajectory of the specific investments you are making to increase the likelihood of a positive return. The second method comes from deposits that an employer matches. Usually employers will match a deposit based on a set formula, such as 50 cents per dollar contributed by the employee. However, employers are only able to contribute to a traditional 401(k), not a Roth 401(k) plan. This is especially important to keep in mind if you want to utilize both types of plans. A key variable to keep in mind is that there are set limits for how much you can add to a 401(k) in a single year. For employees under 50 years of age, this amount is $19,500, as of 2020. For employees over 50 years of age, the amount is $25,000. If you have a traditional 401(k), you can also elect to make non-deductible after-tax contributions. The absolute limit, counting this choice and all employer contributions, is $57,000 for employees under 50, and $63,000 for those over 50 as of 2019.

Plan in Advance

Allow us to help you prepare and plan for your retirement ahead. Contact a financial advisor in St Helena, CA or visit our financial advisor page for other details.

401(k) Plan FAQs

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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