Roth 401(k) to Roth IRA Rollover

What a designated Roth account is, and where it can go

A designated Roth account inside a 401(k) holds contributions that were included in income when they were made. Because tax has already been paid on those contributions, qualified distributions of both the contributions and their earnings are generally excluded from income later, provided the plan’s and the account’s conditions are met.

Movement out of a designated Roth account is restricted by design. Those amounts can generally be rolled to a Roth IRA or to another designated Roth account in a plan that accepts incoming Roth rollovers. They cannot be rolled into a traditional IRA, because that would mix already-taxed money into a pre-tax account and destroy the recordkeeping the Roth rules depend on.

The IRS rollover chart is the quickest reference for confirming which destinations are permitted for designated Roth amounts, and the plan’s distribution forms confirm which of those destinations the plan will actually process.

Who this scenario applies to

Anyone who elected Roth deferrals in a workplace plan and now has a distributable event is in scope. Separation from the employer is the most common trigger; some plans also permit in-service distributions or in-plan rollovers under specific conditions.

Mixed accounts are the norm rather than the exception. A single 401(k) frequently holds designated Roth deferrals, pre-tax deferrals from earlier years, pre-tax employer contributions, and sometimes after-tax non-Roth amounts. Each portion has its own destination rules, so the account has to be read as several buckets rather than one balance.

• You elected Roth deferrals and left the employer that sponsored the plan
• You have both Roth and pre-tax money in the same plan account
• Your plan permits an in-service distribution of designated Roth amounts
• You received employer contributions and are unsure whether they are Roth or pre-tax
• You already hold a Roth IRA and want to know how an incoming rollover interacts with it

What to confirm on your statement first

Three figures do most of the work: the total designated Roth balance, the portion of that balance representing your own contributions, and the portion representing earnings. Plans track Roth basis separately, and the receiving custodian generally needs the contribution figure to report the rollover correctly.

Employer contributions require a separate answer. Matching and nonelective contributions have historically been pre-tax even when employee deferrals were Roth, and while some plans now permit Roth treatment of employer contributions, that is a plan-by-plan design choice. Ask the plan to state, in writing, how each source is classified.

The first year you made Roth contributions to that plan is also worth recording, along with the year you first funded any Roth IRA. Those dates drive the five-year periods described below, and they are much easier to capture now than to reconstruct later.

• Total designated Roth balance in the plan
• Roth basis, meaning the contributions you made, separate from earnings
• Whether employer contributions in the account are pre-tax or Roth
• The first year Roth contributions were made to this plan
• The first year any Roth IRA of yours was funded
• Whether the plan will process a Roth rollover separately from pre-tax amounts

Available paths for designated Roth money

Four options are generally on the table, and they parallel the choices for pre-tax balances with one important narrowing: the Roth character must be preserved at the destination, which rules out a traditional IRA.

A distribution in cash deserves particular care here. Roth contributions come out before earnings under ordering rules, but a distribution that is not qualified can still make the earnings portion taxable and potentially subject to additional tax. Whether a distribution is qualified turns on age or another qualifying event plus the applicable five-year period.

• Leave the designated Roth balance in the former employer’s plan, where plan terms permit
• Roll it to a new employer’s designated Roth account, if that plan accepts incoming Roth rollovers
• Roll it to a Roth IRA, which is the only IRA type that can receive designated Roth amounts
• Take a distribution, understanding that the earnings portion may be taxable if the distribution is not qualified

How the rollover is executed

A Roth IRA has to exist before the plan can pay it. Opening the account and confirming its exact titling and payee instructions ahead of the request avoids the most common cause of a returned or misapplied check.

The request itself should name the destination as a Roth IRA and specify a direct rollover of designated Roth amounts. If pre-tax money in the same plan account is also moving, the request should state where each portion goes, because a single instruction covering a mixed account is where mistakes tend to originate.

After the transfer, verify how the receiving custodian recorded the deposit. A designated Roth rollover should be posted as rollover basis and earnings rather than as an annual Roth IRA contribution, since annual contributions are subject to income limits and dollar caps that do not apply to rollovers. Retaining the plan’s statement of Roth basis alongside the custodian’s confirmation gives you the paper trail that future distribution rules rely on.

• Open and correctly title the Roth IRA before requesting the distribution
• Specify a direct rollover of designated Roth amounts to that Roth IRA
• Give separate instructions for any pre-tax portion of the same account
• Verify the deposit is recorded as a rollover, not an annual contribution
• File the plan’s Roth basis statement with your tax records

Five-year periods, earnings, and other caveats

Two separate five-year periods exist in the Roth system, and conflating them causes real errors. A designated Roth account in a plan has its own period measured from the first Roth contribution to that plan, and a Roth IRA has a period measured from the first year any Roth IRA of yours was funded. Time accumulated inside the plan generally does not carry over to the Roth IRA period.

One practical consequence is that a long-held designated Roth account can move into a newly opened Roth IRA whose own period has barely started. Contributions and rollover basis remain accessible under Roth IRA ordering rules, but earnings can be taxable if withdrawn before the Roth IRA’s conditions are met. Publication 590-B sets out the ordering and qualification rules in detail.

Withholding also behaves differently. Mandatory withholding applies to the taxable portion of an eligible rollover distribution, so a direct rollover of Roth amounts avoids the issue entirely while an indirect one can create a shortfall that must be replaced within the 60-day window.

Required distribution rules for designated Roth accounts have changed in recent legislation, and rules for Roth IRAs differ from rules for plan accounts. Rather than relying on older summaries, confirm the requirement that applies to your plan year with current IRS guidance.

What tends to influence the choice

Consolidation is the most commonly cited reason to move designated Roth money into a Roth IRA, since a Roth IRA is administered directly by the account owner and is not subject to a plan sponsor’s menu or distribution schedule. Investment selection in an IRA is generally broader than a plan menu, though breadth and suitability are different things.

Reasons to stay are equally concrete. Plan-level creditor protection under ERISA is broad, some plan menus include options not available retail, and a designated Roth account inside a plan may permit loans or an installment schedule that fits how the money will be used. Distribution flexibility, the five-year clock position, and how the account fits an overall plan all belong in the comparison.

• Whether a Roth IRA five-year period is already established for you
• Access needs for earnings before the Roth IRA’s conditions are satisfied
• Costs disclosed by the plan compared with the receiving custodian’s published schedule
• Investment options available in each account
• Creditor protection differences between ERISA plans and IRAs
• How pre-tax employer money in the same account will be handled
• Beneficiary planning and the different rules that apply to inherited Roth accounts

Questions worth asking in writing

The plan administrator and the receiving custodian each hold part of the answer, and the useful questions are narrow and factual rather than open-ended. Getting them answered in writing before the distribution protects the Roth character of the money.

Basis figures deserve particular persistence. Plans track Roth contributions separately from earnings, and that figure is difficult to reconstruct once an account has been closed, so obtaining it in writing while the account still exists is worth an extra call.

• What is my designated Roth balance, and how much of it is contributions versus earnings?
• What year did my Roth contributions to this plan begin?
• Are employer contributions in my account pre-tax or Roth?
• Will the plan send Roth and pre-tax amounts to different destinations in one request?
• How will the receiving custodian record rollover basis for this deposit?
• What distribution code will appear on my Form 1099-R for a direct Roth rollover?

Sources to verify

• IRS — Rollovers of Retirement Plan and IRA Distributions
• IRS — Rollover Chart (which account types can receive which rollovers)
• IRS — Retirement Topics: Designated Roth Account
• IRS — Roth Account in Your Retirement Plan
• IRS — Roth IRAs
• IRS — Publication 590-B, Distributions from IRAs
• IRS — Roth Comparison Chart
• IRS — Retirement Topics: Termination of Employment
• U.S. Department of Labor — Retirement Savings Lost and Found

Educational information only — not tax, legal, or investment advice. Plan rules vary. Advisor availability is confirmed case by case.