The Basics of Rolling Over a Roth 401(k)

Matt DattilioPosted by Matt Dattilio on January 9, 2019

There are countless reasons why it’s worth saving money in a Roth 401(k). Benefits such as tax diversification, employee matching, and no Required Minimum Distributions (RMDs) make this type of account very attractive to smart investors, and the option typically presents itself as being superior to the traditional 401(k). For those who are nearing or entering retirement, however, rolling over a Roth 401(k) into a Roth IRA might be one of the soundest financial moves possible. 

How do you know if a Roth 401(k) rollover is right for you? Here are a few things to consider, as well as how to go about the rollover process. 

Why / Why Not Roll Over a 401(k)?

As with traditional 401(k) plans, a Roth 401(k) can be rolled over into either a new employer’s Roth 401(k), an IRA, or a Roth IRA. In many cases, you’ll have access to less expensive investment options when rolling a Roth 401(k) into a Roth IRA. Another reason why this is a much-considered move by those nearing retirement is because with a Roth IRA, you won’t have to deal with RMDs in the same way as you will with a Roth 401(k). These two benefits are reason enough to consider making the switch, but they don’t take into consideration the other side of the coin.

There are a number of circumstances in which rolling over a Roth 401(k) is not a good idea. Perhaps your 401(k) offers better investment options than you’d find in an IRA (a rarity these days, unfortunately) or maybe you’ve left the employer at age 55+ and would like to spend some of what you’ve earned before reaching the 59½ cut-off age without having to endure any penalties. If neither of these scenarios apply, however, a rollover is likely a wise move. 

How to Roll Over Your Roth 401(k) into a Roth IRA

So, you’ve determined it’s time for a rollover to occur—how do you get started? With a traditional 401(k) plan, you would have to move your savings into a traditional IRA and then opt to convert it into a Roth IRA—not true for a Roth 401(k). This type of account can be directly rolled into a Roth IRA without the need to take any in-between steps, as the money in both accounts will be after-tax. Note that you might still need to figure out employer-matched contributions, which typically live in a traditional 401(k) as opposed to the Roth variety. 

Your brokerage may even allow you to perform a rollover online, and you can rest easy knowing that Roth IRAs can be reverted to traditional IRAs down the road should penalties and interest become a problem.

The Bottom Line: Consider a Roth 401(k) Rollover

Rolling over your Roth 401(k) into a Roth IRA allows you a much wider breadth of investment options to choose from, many of which can be far more lucrative than the 401(k) itself. Add to this the negation of RMDs, and the rollover process becomes even more worthy of attention. For best results, consider working with a professional financial advisor to help streamline your Roth 401(k) rollover.