Rolling a Roth 401(k) to a Roth IRA Watch Out for This 5-Year Rule

Does Rolling a Roth 401(k) Into a Roth IRA Reset the Five-Year Clock?

If you've been building a Roth 401(k) for years and you're planning to roll it into a Roth IRA when you leave your job, there's a five-year rule that catches a lot of people off guard. The years you spent building that Roth 401(k) don't automatically come with you to the Roth IRA.

In this video, we walk through exactly how the five-year rule works for Roth IRAs and Roth 401(k)s, why the two accounts pay out money differently, and the simple move that can protect the tax-free treatment of your Roth earnings before you ever make the rollover.

This topic connects to broader Roth planning decisions. You may also find our video on whether Roth conversions are a smart move or a tax trap helpful for understanding how the Roth conversion five-year rule works separately from the rollover rule covered here.

What Makes a Roth IRA Withdrawal Qualified and Tax-Free

For earnings in a Roth IRA to come out completely tax and penalty-free, what the IRS calls a qualified distribution, two conditions generally need to be met. First, you're age 59 and a half or older, or the withdrawal is due to death, disability, or for Roth IRAs only, a first-time home purchase. Second, you've satisfied the five-year rule.

For a Roth IRA, that five-year clock starts January 1 of the year you first put money into any Roth IRA. And here's the part that most people appreciate: there's only one clock for all your Roth IRAs. Open a second one at a different custodian ten years later and it doesn't matter. Once you've met the rule across any Roth IRA, it's met forever for all your Roth IRAs.

Why Roth IRAs and Roth 401(k)s Pay Out Money Differently

A Roth IRA follows ordering rules. Contributions come out first, then conversions and rollovers, and earnings come out last. This means before you ever touch a dollar of growth, you can generally pull out your entire contribution basis tax-free and penalty-free at any age, regardless of whether the five-year rule has been met.

A Roth 401(k) doesn't work that way. If your withdrawal from a Roth 401(k) isn't qualified, every dollar comes out pro-rata, a proportional mix of your contributions and your earnings. You can't choose to pull from contributions only.

This distinction is at the heart of why rolling a Roth 401(k) into a Roth IRA before taking money out can matter significantly for someone whose Roth 401(k) hasn't met its own five-year rule yet.

An Illustrative Example: The $120,000 Roth 401(k)

Say you're 63 and retiring. Your company added a Roth option three years ago, so your Roth 401(k) hasn't met its five-year rule yet. The account is worth $120,000: $90,000 you contributed and $30,000 of growth. You need $40,000.

If you pull that $40,000 directly from the Roth 401(k), 25% of it, or $10,000, is earnings because of the pro-rata rule. At a 24% federal tax rate, that's roughly $2,400 in tax on money you contributed after tax to begin with.

But if you roll that Roth 401(k) into a Roth IRA first, the ordering rules apply instead of the pro-rata rule. That same $40,000 comes out of your contribution and rollover basis before it touches earnings. In this example, the tax owed is zero.

Illustrative example only. Assumes a 24% federal tax rate, a Roth 401(k) that has not met its five-year rule, and no state income tax. Actual results will vary based on individual circumstances. Consult your tax advisor.

The Trap: Your Roth 401(k) Years Don't Transfer to the Roth IRA

Here's where people get caught. Each Roth 401(k) has its own five-year clock. When you roll it into a Roth IRA, those years don't transfer. The Roth IRA's five-year clock is the only one that counts.

Go back to the 63-year-old in the example. Their Roth 401(k) hasn't met its five-year rule and they've never opened a Roth IRA. They roll it over in January 2026. The earnings land in the Roth IRA's earnings bucket and the Roth IRA's five-year clock just started. Those earnings won't be tax-free until January 2031, at age 68.

But if that person had opened a Roth IRA back in 2021, even with a small contribution, the rollover would have landed in an account that was already seasoned. Since they're over 59 and a half, the five-year requirement would already be satisfied. The entire rollover balance, including the earnings, would be immediately qualified.

Two Things to Do Before You Roll Over

First, check whether you've already established a Roth IRA. If you have one, find out what year the five-year clock started. That date determines whether your rolled-over earnings are immediately qualified or need to wait. If you haven't opened a Roth IRA yet, talk with your advisor or tax professional about establishing one before the rollover happens rather than waiting until retirement to think about it.

Second, be aware that Roth conversions have a separate five-year rule of their own, different from the rollover rule covered in this video. The rollover rule determines whether your Roth IRA's earnings are qualified. The conversion rule governs whether converted amounts can be withdrawn penalty-free if you're under 59 and a half. Don't mix the two up. They apply in different situations.

For a deeper look at how Roth accounts fit into a broader tax-diversified retirement strategy, see our video on the retirement tax mistake most people miss .