Liz Weston: Some Roth 401 (k) Rules Are Different From Roth IRAs

Dear Liz: I have a Roth 401 (k). Are withdrawals the same as from a Roth IRA? And how do you move it to a Roth IRA?

Answer: Roth 401 (k) are a type of workplace retirement plan that, like Roth IRAs, allows tax-free withdrawals. But the rules for Roth 401 (k) are somewhat different from those for Roth IRAs.

For example, a Roth IRA allows you to withdraw an amount equal to your contributions without taxes or penalties at any time, regardless of your age. Gains can be withdrawn from a Roth IRA without tax or penalty once you are 59.5 years old and the account is at least 5 years old. The clock starts on January 1 of the year you make your first contribution.

To withdraw money tax-free or penalty-free from a Roth 401 (k), you generally must be 59½ years of age or older and the account must be at least 5 years old.

Additionally, Roth 401 (k) – like regular 401 (k) and traditional IRAs – are subject to minimum required distribution rules that require you to start withdrawing money at age 72. Roth IRAs are not subject to these rules.

Many people roll their Roth 401 (k) into Roth IRAs to avoid the minimum distribution rules required or to have more investment choices. Such a rollover resets the five-year clock that determines whether a withdrawal results in taxes and penalties, however. If you’re waiting until you retire to renew your Roth 401 (k) and need access to the cash, that waiting period could be problematic.

You can renew your Roth 401 (k) after leaving the employer offering the plan. But you can also ask if your plan allows “in-service” rotations, that is, rotations while you are still working for the employer. Some Roth 401 (k) allow them, although they may be limited to people 59 ½ and over.

Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions can be sent to him at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.