How to Complete a Roth 401(k) Rollover

A Roth 401(k) is an employer-sponsored retirement plan that allows you to contribute after-tax dollars. This means your contributions are not tax-deductible, but qualified withdrawals in retirement are completely tax-free. A rollover is the process of moving funds from one retirement account to another, a common action when changing jobs or seeking different investment options.

Rollover Destination Options

When moving funds from a Roth 401(k), you have two primary destinations for your after-tax contributions. The first option is a Roth Individual Retirement Arrangement (IRA), which offers a wide range of investment choices like individual stocks and bonds that may exceed the limited menu in a 401(k) plan.

Your second option is to roll your Roth 401(k) into a new employer’s Roth 401(k) plan, if the plan accepts such rollovers. This choice is useful for consolidating retirement savings in one place. A 401(k) structure may also offer better creditor protection than an IRA in some circumstances.

A potential complication involves funds from employer matching contributions. While these have traditionally been made with pre-tax dollars, employers now have the option to offer matching contributions on a Roth (after-tax) basis. The type of match you received determines your rollover options.

If your employer match was pre-tax, those funds must be rolled over into a separate pre-tax account, like a Traditional IRA or a traditional 401(k), to avoid a taxable event. If your employer provided a Roth match, those funds are part of your Roth balance and can be rolled over with your own contributions to a new Roth IRA or Roth 401(k).

Understanding Key Rollover Rules

You must choose between two IRS-governed methods for moving your money. In a direct rollover, your old plan administrator sends the funds directly to your new account’s custodian via wire transfer or a check made payable to the new institution. Because you never take personal possession of the money, this method avoids tax withholding.

The alternative is an indirect rollover, where the plan administrator sends a check directly to you. You have 60 days to deposit the funds into a new retirement account. If you miss this deadline, the distribution becomes taxable income, and you may owe an additional 10% early withdrawal penalty if you are under age 59½.

An indirect rollover of pre-tax funds, such as a traditional employer match, triggers a mandatory 20% federal tax withholding. For example, on a $10,000 pre-tax rollover, your old plan sends you a check for $8,000. To complete a tax-free rollover, you must deposit the full $10,000 into a Traditional IRA within 60 days, using $2,000 of your own money. You can then reclaim the $2,000 withholding when you file your annual tax return.

Another regulation is the Roth 5-year rule, which determines if earnings can be withdrawn tax-free. A Roth IRA has its own 5-year clock that starts on January 1 of the tax year you first contribute to any Roth IRA. When you roll a Roth 401(k) into a Roth IRA, the IRA’s clock governs the rolled-over funds.

If you roll funds into a brand-new Roth IRA, a new 5-year clock begins for the earnings portion. However, if you roll the funds into a Roth IRA you have held for over five years, the assets adopt the existing clock, and earnings are immediately considered qualified for tax-free withdrawal if you are over age 59½.

Information and Documents for the Rollover

To initiate a rollover, you must gather specific information and complete a rollover distribution request form from your old 401(k) plan administrator. This form is the official instruction for the transfer and is usually available on the administrator’s online portal or from your former HR department. You will need the following information:

• Your old 401(k) plan administrator’s name, mailing address, and phone number
• Your account number for the old plan
• The receiving institution’s name and new account number
• The proper mailing address or wiring instructions for the new account

On the form, you will specify the amount to roll over and explicitly choose between a direct or indirect rollover. If your account contains both traditional pre-tax funds and Roth money, the form will require you to provide the separate destination account details for each. You will need the account information for your Roth destination and separate details for a Traditional IRA or new pre-tax 401(k) for the pre-tax funds.

The Rollover Process Step-by-Step

With your destination accounts open and the form completed, submit the request to your old plan administrator. This is often done by uploading the signed form to their secure online portal, but some administrators may require submission via mail or fax.

Once the administrator receives your request, they will liquidate your investments and send the funds. For a direct rollover, the check or wire transfer is sent to the financial institution you designated. This process can take several business days to a few weeks, and you can often monitor the status through your old plan’s online portal.

The final action is to confirm the funds have been deposited into your new account(s). For a direct rollover, log in to your new Roth IRA or 401(k) account to verify the deposit. If you chose an indirect rollover, you must personally deposit the check into the new account within the 60-day window.

You will receive a Form 1099-R from your old plan administrator in January of the following year, which reports the distribution to the IRS. For a direct rollover of Roth funds to a Roth IRA, Box 7 should show code “H”. For the pre-tax portion rolled to a Traditional IRA, the code should be “G”. You must use this form to properly report the rollover on your tax return, confirming it was a non-taxable event.