Leaving a job brings a pile of paperwork. The retirement plan form is an easy one to rush. If part of your savings sits in a Roth 401(k), slow down for that one.
Roth money has already been taxed. That’s the whole point. Handled well, it keeps growing and can come out tax free later. Handled badly, you can lose ground on an important tax clock or mix it with money that was never taxed.
Here’s what to know before you sign anything.
You Have Four Basic Choices
When you leave an employer, your Roth 401(k) money usually has four possible homes.
- Leave it in the old plan, if the plan allows it.
- Move it to your new employer’s Roth 401(k), if that plan accepts rollovers.
- Roll it into a Roth IRA.
- Cash it out.
Cashing out is the one to avoid. Earnings you take out early can be taxed, and a 10% penalty may apply if you’re under 59 and a half. The other three choices keep the tax benefits in place. Which one fits depends on the details below.
The Five-Year Clock Doesn’t Always Travel With You
Roth accounts come with a five-year rule. Earnings come out tax free only after five tax years have passed and you meet another test, such as reaching 59 and a half.
Here’s the catch. If you roll a Roth 401(k) into a Roth IRA, your years in the 401(k) don’t count toward the IRA’s clock. A brand new Roth IRA starts from zero.
There’s a simple fix. If you opened any Roth IRA in an earlier year, that older start date controls. Someone who opened a small Roth IRA years ago has already met that clock. Someone who never had one may want to open one long before they need the money.
A move to a new employer’s Roth 401(k) works differently. With a direct rollover, the new plan keeps your earlier start date. For a closer look at moving Roth 401(k) money in Phoenix, including the order of paperwork that keeps each clock intact, that guide walks through real examples.
Your Employer Match Is Probably Not Roth Money
This part surprises a lot of people. Your own Roth contributions went in after tax. In most plans, though, the company match went into a separate pre-tax account. Some plans now let workers choose Roth treatment for the match, so check your statement.
That means one Roth 401(k) can hold two kinds of money. The Roth part can go to a Roth IRA or another Roth 401(k). The pre-tax part usually goes to a traditional IRA. If the two get mixed up, you can end up with tax forms that don’t match what really happened.
The IRS covers these accounts and their rollover rules in its questions and answers on designated Roth accounts. It’s worth a skim before you call your plan.
One Old Reason to Roll Over Is Gone
For years, people moved Roth 401(k) money into a Roth IRA to dodge required withdrawals later in life. That reason went away in 2024. Roth money in a workplace plan no longer has to come out while you’re alive.
So leaving the money where it is can be a fine choice. Large plans sometimes offer low-cost funds. And if you leave your job in or after the year you turn 55, your old plan may let you take money out without the 10% penalty. An IRA generally makes you wait until 59 and a half.
A Simple Order to Follow
If you decide to move the money, a little order goes a long way.
- Open the receiving account first.
- Ask the plan which dollars are Roth and which are pre-tax.
- Request a direct rollover so the money goes straight to the new account.
- Check your tax forms the next year to make sure they match.
Take it one step at a time. Roth money is some of the most flexible money you’ll ever own, so it deserves a careful move.
