You might be eligible to convert your employer’s 401(k) plan savings into a Roth 401(k) and receive additional tax benefits if you have been diligently saving for retirement through it.
Yes, you can roll over a Roth 401(k) to a Roth IRA. This can be a smart move if you’re leaving your job or retiring and want to avoid paying taxes on your retirement savings. However, there are a few things you need to know before you do this.
How to Roll Over a Roth 401(k) to a Roth IRA
To roll over a Roth 401(k) to a Roth IRA, you’ll need to follow these steps:
- Contact your employer’s 401(k) provider and request a rollover. They will then specify how much of the funds are pre-tax and how much are Roth contributions.
- Direct them to make the funds transfer payable to the company where you hold your Roth IRA.
It’s important to request a direct rollover to avoid tax penalties. If you have your 401(k) plan administrator send you a check directly, you’ll have to redeposit the money into your Roth IRA account within 60 days of the distribution. Your plan administrator would also withhold 20% for taxes.
Here are some additional things to keep in mind when rolling over a Roth 401(k) to a Roth IRA:
- The five-year rule: To avoid paying taxes on earnings when you withdraw from a Roth IRA, the account must be open and active for at least five years. This rule applies to both Roth 401(k)s and Roth IRAs.
- Income limits: There are income limits for contributing to a Roth IRA. For 2023, the income limit for single filers is $144,000 and $214,000 for married filing joint.
- Investment options and fees: The investment options and fees of a Roth IRA may be different from those of your Roth 401(k). Be sure to compare them before you decide to roll over your funds.
Pros and Cons of Rolling Over a Roth 401(k) to a Roth IRA
Pros:
- Avoid RMDs: With a Roth IRA, you don’t have to take required minimum distributions (RMDs) at age 72. This means you can let your retirement savings grow tax-free until you need them.
- Tax-free withdrawals: When you retire, qualified distributions from a Roth IRA are tax-free.
- Leave assets to beneficiaries: You can leave your Roth IRA assets to your beneficiaries tax-free.
Cons:
- Five-year rule: You may have to wait five years to withdraw earnings from your Roth IRA without penalty.
- No loans: You can’t take out a loan from a Roth IRA.
- Income limits: There are income limits for contributing to a Roth IRA.
Should You Roll Over Your Roth 401(k) to a Roth IRA?
Whether or not you should roll over your Roth 401(k) to a Roth IRA depends on your individual circumstances. Here are some factors to consider:
- Your age: If you’re young, you may want to keep your Roth 401(k) so that you can take advantage of the five-year rule.
- Your income: If your income is above the Roth IRA income limit, you won’t be able to contribute to a Roth IRA.
- Your investment options: If your Roth 401(k) offers better investment options or lower fees than a Roth IRA, you may want to keep your money in your 401(k).
It’s a good idea to talk to a financial advisor before you decide to roll over your Roth 401(k) to a Roth IRA. They can help you understand the pros and cons and make the best decision for your situation.
Frequently Asked Questions
Can I roll over a Roth 401(k) to a traditional IRA?
No, you cannot roll over a Roth 401(k) to a traditional IRA. This is because Roth 401(k)s are funded with after-tax dollars, while traditional IRAs are funded with pre-tax dollars.
Can I roll over a Roth 401(k) to another Roth 401(k)?
Yes, you can roll over a Roth 401(k) to another Roth 401(k). This can be a good option if you’re starting a new job and your new employer offers a Roth 401(k) plan.
Can I roll over a Roth 401(k) to a Roth IRA if I’m not yet 59.5 years old?
Yes, you can roll over a Roth 401(k) to a Roth IRA if you’re not yet 59.5 years old. However, you will have to pay taxes on any earnings that you withdraw from the Roth IRA before you reach age 59.5.
Can I roll over a Roth 401(k) to a Roth IRA if I’ve already taken a distribution from my Roth 401(k)?
Yes, you can roll over a Roth 401(k) to a Roth IRA if you’ve already taken a distribution from your Roth 401(k). However, you will have to pay taxes on any earnings that you withdraw from the Roth IRA that were not previously taxed.
Rolling over a Roth 401(k) to a Roth IRA can be a smart move if you’re leaving your job or retiring and want to avoid paying taxes on your retirement savings. However, there are a few things you need to know before you do this, such as the five-year rule and income limits. It’s a good idea to talk to a financial advisor before you decide to roll over your Roth 401(k) to a Roth IRA.
How to Convert to a Roth 401(k)
This is a basic rundown of the steps involved in switching from a traditional to a Roth 401(k):
- To find out if conversion is even an option, speak with your employer or the plan administrator.
- Calculate the tax of converting.
- Make sure you have enough money saved up outside of your retirement account to pay the amount of taxes you will owe.
- Inform the plan administrator or your employer that you’re prepared to convert.
- The next steps could vary from business to business, but the plan administrator ought to be able to provide you the required paperwork.
Not all employers permit their staff members to convert their pre-existing 401(k) balance to a Roth 401(k). If you are unable to convert, think about contributing to a Roth account in place of a traditional one for your future 401(k) contributions. You are allowed to have both types.
As previously stated, income tax will be due on the amount you convert. Therefore, after figuring out the tax cost of conversion, determine how much money you can set aside outside of your retirement account to cover it. Recall that you have until the day of your tax return filing to settle the balance. For instance, if you convert in January, you will need to save the funds until April of the following year.
Don’t take money out of your retirement account to cover the conversion tax bill. Try to find the money elsewhere or put it aside for it.
Should You Convert to a Roth 401(k)?
If conversions to a Roth 401(k) are permitted by your employer, you should think about the following two things before deciding:
- If you anticipate being in a higher tax bracket in retirement than you are now, switching to the Roth might be a wise decision. When your tax rate rises later, you will benefit from tax-free income that you paid for now at a lower rate.
- You’ll owe income tax on any money you convert, so do you have the money to pay the taxes? For example, if you move $100,000 into a Roth 401(k) and your income is in the 2022–2023 tax bracket, your tax liability will be $22,000. Instead of taking money out of your 401(k) to pay the tax bill, make sure you have the money somewhere else. Otherwise, youll miss out on years of compounding. And you might have to pay far more than $22,000 for that in the end.