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Wealth management is more than just investment advice – it includes all aspects of a client’s financial life.

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At Virtus Wealth Management, we believe we can help you no matter what age you are, what life stage you are in, or how much money you are working with. We want you to feel educated, empowered, and involved in the planning of your financial future.

It’s Time to Understand the Roth 401k Rollover 5-Year rule

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  • It’s Time to Understand the Roth 401k Rollover 5-Year rule

by | Dec 14, 2020

Have you decided to save for retirement? Or maybe your employer started a retirement account for you with an employer sponsored 401(k)?

What most people don’t realize is there are two kinds of 401(k) plans. One is a traditional pre-tax retirement plan and the other is a Roth 401(k) post-tax retirement plan. This offers some additional options and benefits for you, depending on what your plans are for the future.

In this article, we will discuss the Roth 401(k) rollover 5-year rule and what you need to know if you decide you want to rollover your Roth 401(k).

So, let’s roll right into it.

What is the Roth 401(k) rollover 5-year rule?

In order for you to have a clear understanding of this rule, it is important to clear up some differences between a traditional 401(k) and the Roth 401(k).

  • A traditional 401(k) is funded with pre-tax dollars and taxed upon withdrawal.
  • A Roth 401(k) is funded with post-tax dollars and not taxed upon withdrawal.

Yes, this is a simple explanation but it’s just to give you some contrast between the two. The Roth 401(k) just like the Roth IRA (individual retirement account) allows you to withdraw your contributed funds and earnings without penalty with a few stipulations.

  1. You must be 59 ½ or older
  2. You must have satisfied the 5-year rule

Both must be met, or penalty tax will ensue (again some circumstances can prevent a penalty but that is for another article).

The 5-year rule states five years have to pass from your original date of the first contribution into your Roth 401(k) before you can qualify for an approved distribution without penalty from your retirement account.

In other words, if you withdraw any contributions from your 401(k) retirement plan within a five year period you will be subject to income tax and penalties.

Why Is This Important to Understand?

The Roth 401(k) rollover 5-year rule is very easy to wrap your head around, the tricky part is when you begin rolling over your accounts. If you don’t understand a few more details about this rule, some other mistakes could be made.

It’s important to understand how the 5-year rule is calculated when you actually rollover your 401(k) to a new retirement plan, like a Roth IRA or a new Roth 401(k) at a new company. The biggest thing you want to pay attention to is how long the plan you currently have has been active. But we will talk more about that later when we go over some examples.

Who needs to know about the Roth 401(k) Rollover 5 Year Rule?

If you are just starting out and beginning to save for retirement, you’re a prime candidate for this information. Virtus Wealth Management is a great place to start, we specialize in wealth management and can answer any questions you may have about the subject.

Are you a seasoned employee with an employer-sponsored 401(k)? Virtus Wealth Management can help with Roth 401(k) conversions  give us a call at (817) 717-3812.

Where Can You Go to Learn More?

No matter if your new to the workforce and want to get a jump start on your retirement efforts, or you have been contributing to your retirement for years Virtus Wealth Management has the experience, financial planners, and holistic approach to guide you to your retirement goals.

With a plethora of services, from Risk management, Estate planning  and Roth conversion, starting here to learn more will save you time, and reduce frustration when learning about wealth management.

Using the Roth 401(k) 5 Year Rule to Your Advantage

Earlier we talked about the 5-year rule and how you need to be aware of the finer details when you’re about to rollover your 401(k). Below are a few scenarios.

  • Rolling over a Roth 401(k) to a Roth IRA: If you’re not privy to the rule you can take a Roth 401(k) you have had for over 5 years and move it to a Roth IRA you just stared.

This will cause you to lose your holding period (the time your plan is active). That’s because the holding period from Roth 401(k) does not transfer to a new account.

It will have the same holding period as your new Roth IRA. Meaning you can be penalized for withdrawing money from the Roth IRA.

  • On the other hand, if you have already had a Roth IRA open for more than 5 years then you can do a rollover from your Roth 401(k) into your existing Roth IRA and the contributions and earnings will have the same holding period as your Roth IRA, passing the 5 year test.

The takeaway is this, you must be aware of how the Roth 401k rollover 5-year rule works.

If you are considering opening a Roth IRA to do a rollover or have questions about 401(k) rollover services call one of our advisors here at Virtus Wealth Management at (817) 717-3812.

Final Thoughts

Retirement is a goal most of us all want to achieve, having a coach is a good way to start. By knowing about the Roth 401(k) rollover 5-year rule, you are able to make better decisions about your retirement.

So, what have we learned: 

  • The 5-year rule means that 5 taxable years must pass on any Roth IRA or Roth 401(k) plan before an approved distribution of funds can be withdrawn from the retirement account.
  • You learned the difference between a traditional 401(k) and a Roth 401(k).
  • You learned how to use the Roth 401(k) rollover 5-year rule to your advantage.

And most importantly you learned where to find more help if you need it. Virtus Wealth Management has dynamic answers, for decades we have been helping people just like you create a road map to retire how they imagined.

The Roth 401(k) rollover 5-year rule is one of those rules that is an important step in understanding wealth management. Calling Virtus Wealth Management to get started is another, reach us at (817) 717-3812.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.


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