Quick answer
Rolling a Roth 401(k) to a Roth IRA is typically a tax‑free, trustee‑to‑trustee transfer if you roll directly. However, the rollover changes two major tax mechanics: required minimum distributions (RMDs) and the application of the Roth five‑year rule to earnings. It can also change your ability to contribute later and affect special plan features (for example, in‑plan conversions or after‑tax contribution strategies). See the IRS guidance on designated Roth accounts and IRAs for official rules (IRS).
How the rollover is taxed: direct vs. indirect
- Direct rollover (trustee‑to‑trustee): The plan sends funds directly to your Roth IRA custodian. This is treated as a nontaxable rollover when both accounts are Roth-designated. It avoids withholding and is the safest way to preserve tax status. (See IRS guidance on rollovers and designated Roth accounts.)
- Indirect rollover: You receive the distribution and must deposit it into a Roth IRA within 60 days. Indirect rollovers are riskier — missing the 60‑day window can trigger taxes and penalties, and plan administrators may withhold a portion for taxes even though the distribution is from a Roth account.
In my practice I recommend direct rollovers whenever possible — they eliminate withholding errors, reduce paperwork, and avoid accidental taxable events.
Sources: IRS—Designated Roth Accounts; IRS—Individual Retirement Arrangements (IRAs).
Required minimum distributions (RMDs): a deciding factor
One of the most important tax differences is RMD treatment:
- Roth 401(k): Subject to RMD rules while you hold money in the plan. You must start taking RMDs at the plan’s required starting age unless you are still employed and meet plan exceptions. See IRS Retirement Topics—RMDs.
- Roth IRA: No RMDs during the original owner’s lifetime. Rolling a Roth 401(k) into a Roth IRA removes the RMD obligation for that money.
If avoiding RMDs is an objective (for estate planning or tax management), rolling into a Roth IRA is often the cleaner choice. In several client cases I’ve helped manage, rolling out of a Roth 401(k) eliminated forced distributions that would have increased taxable Social Security or Medicare IRMAA calculations for heirs.
Five‑year rule(s): contributions vs. conversions vs. plan years
Roth accounts have timing rules that determine whether earnings are qualified (tax‑free) when withdrawn:
- Roth IRA five‑year rule: Starts on January 1 of the tax year for which you made your first contribution (including conversions). Once five tax years have passed and you meet an age/exception requirement (e.g., 59½), earnings are qualified distributions.
- Roth 401(k) five‑year rule: A separate five‑year period may apply for the Roth 401(k) plan. If you roll a Roth 401(k) into a Roth IRA, the Roth IRA’s five‑year clock can start based on your earliest Roth contribution or conversion to any Roth IRA (not the 401(k) clock). That can be beneficial or problematic depending on timing.
Practical point: If your Roth 401(k) is younger than five years and you roll to a Roth IRA that is also younger than five years, you may not have qualified earnings yet. Keep documentation of plan start dates — custodians sometimes need that to establish the earliest five‑year date.
Authoritative note: IRS Publication 590‑B explains distribution ordering rules and the five‑year test for Roth IRAs.
Contribution limits and future savings
- Roth 401(k): Contribution limits are set by the IRS and are generally higher than Roth IRA limits. Employer plans may also allow catch‑up contributions for those age‑eligible. (Check current annual limits on IRS.gov.)
- Roth IRA: Lower annual contribution limits and income phase‑outs may prevent high‑income filers from contributing directly. However, a Roth IRA still accepts rollover money regardless of income.
Strategy: Some clients keep a Roth 401(k) when they want to continue high annual contributions while keeping separate Roth IRAs for tax‑free growth and estate planning flexibility.
Employer features and protected benefits
Employer plans sometimes offer features you lose when you roll to an IRA:
- Access to certain loan programs (IRAs do not permit loans).
- Creditor protection varies by state; federal law offers strong protection for employer plan assets in bankruptcy, which can differ for IRAs.
- In‑plan Roth conversions or after‑tax contribution treatment (mega backdoor Roth) may be available inside the 401(k) plan but must be executed before leaving the plan.
Review plan documents and consult the plan administrator before making moves.
Reporting and paperwork
Rollovers must be reported correctly:
- Your 1099‑R will report distributions. For direct Roth‑to‑Roth rollovers, box 7 should show distribution codes indicating a rollover or direct trustee transfer.
- Your IRA custodian may issue Form 5498 showing rollovers into the Roth IRA.
Inaccurate reporting can prompt IRS notices or unnecessary withholding; a direct rollover minimizes those issues.
Common mistakes and how to avoid them
- Treating a Roth 401(k) payout as tax‑free without confirming it’s a Roth‑designated distribution. Always confirm plan designation and tax basis before rolling.
- Using an indirect rollover and missing the 60‑day deadline.
- Forgetting that RMDs apply to Roth 401(k) funds left in a plan.
- Rolling after‑tax employee contributions incorrectly (after‑tax employer contributions may have different tax consequences).
Checklist to avoid costly errors:
- Confirm the distribution is from the Roth portion of the plan. 2. Request a direct trustee‑to‑trustee rollover. 3. Obtain documented plan start dates to establish five‑year rules. 4. Ask the plan administrator about in‑plan features you may lose. 5. Save 1099‑R and 5498 copies for tax records.
When rolling could create a tax bill
Most Roth‑to‑Roth rollovers are tax‑free. But watch these exceptions:
- Rolling non‑Roth (pre‑tax) 401(k) funds into a Roth IRA is a Roth conversion and is a taxable event. The converted amount is subject to ordinary income tax in the year of conversion.
- Improperly executed indirect rollovers can cause taxable distributions and potential penalties.
If you plan to convert traditional 401(k) or pre‑tax 401(k) balances to Roth, model the tax hit. In my practice I often recommend spreading conversions over several years to manage bracket impacts (see our article on Roth conversion planning).
Internal resources: For related reading, see our guide on Roth 401(k) vs Roth IRA: When to Use Each for Tax Diversification and our practical checklist in Rollovers vs Transfers: Avoiding Tax Traps When Changing Employers.
Real‑world examples (short)
- Example A: Emily rolled a five‑year‑old Roth 401(k) into her Roth IRA. Because her Roth IRA already met the five‑year rule, her earnings remained qualified and she avoided future RMDs.
- Example B: Sam left a Roth 401(k) with less than five years of participation and rolled directly to a new Roth IRA. He needed the plan start date records to show the IRS his five‑year clock began earlier; otherwise, some earnings would have been non‑qualified until the five‑year mark.
Practical steps to execute a rollover
- Confirm Roth designation and confirm whether you want to move the entire Roth 401(k) or a partial balance. Partial rollovers are allowed by many plans. 2. Contact your plan administrator and request a direct rollover to a named Roth IRA custodian. 3. Provide the Roth IRA account and custodian routing details. 4. Keep all paperwork, 1099‑R, and subsequent Form 5498. 5. Follow up with your IRA custodian to confirm funds were received as a rollover.
When to get professional help
Get tax or financial advice if any of the following apply:
- You’re considering converting pre‑tax balances to Roth and expect a sizable tax bill.
- You have mixed after‑tax and pre‑tax dollars in the plan.
- You are close to RMD age and need coordination between plan rules and IRA rules.
I routinely advise clients to run projected tax scenarios before large rollovers or conversions.
Sources and further reading
- IRS, Designated Roth Accounts: https://www.irs.gov/retirement-plans/designated-roth-accounts
- IRS, Individual Retirement Arrangements (IRAs): https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
- IRS, Retirement Topics — Required Minimum Distributions (RMDs): https://www.irs.gov/retirement-plans/retirement-topics-required-minimum-distributions-rmds
- IRS Publication 590‑B, Distributions from Individual Retirement Arrangements (for five‑year rules and ordering rules).
Professional disclaimer: This article is educational and general in nature. It does not constitute personalized tax or investment advice. Rules change and your situation may require tailored analysis — consult a qualified tax advisor or financial planner before acting.
