The 5-Year Rules: Moving a Roth Employer Plan to a Roth IRA

You have a Roth 401(k), 403(b), 457(b) or federal government Roth TSP. You have left your job and want to move those funds to a Roth IRA. What 5-year rule applies to the rolled over funds?

Each Roth employer plan has its own 5-year clock unlike Roth IRAs, which have one clock that starts when you establish your first Roth IRA. This is the 5-year rule for “qualified” distributions, those distributions of earnings that are made after 5 years and age 59 ½ and thus are tax-free.

A Roth IRA can never be moved into a Roth employer plan but when you leave your employer your Roth employer plan can be rolled over to a Roth IRA. Once that rollover is done, what 5-year clock applies to the funds you have just rolled over?

The Roth IRA 5-year clock is the one that will apply. This can be good - it can be bad.

Example: John, age 62, has had his Roth 401(k) for 7 years. He has no Roth IRA. He rolls his Roth 401(k) to a Roth IRA. His 5-year clock for the funds will be the one applicable to his Roth IRA. Since this is his first Roth IRA, he will not be able to take a qualified distribution of earnings until 5 years have passed.

Robert, age 62, has had his governmental Roth 457(b) for 2 years. He has had a Roth IRA for 7 years. He rolls his Roth 457(b) account to a Roth IRA. His 5-year clock for the funds will be the one applicable to his Roth IRA. Since he has had a Roth IRA for 7 years and he is over age 59 ½, any distributions of the 457(b) funds will be a qualified distribution (tax-free).

- By Beverly DeVeny and Jared Trexler

Posted in: beverly deveny,Ed Slott,ed slott ira,financial,financial advisor,IRAs,money,Retirement,Roth 401(k),Roth IRA,Roth IRA 5-year rules,savings