Roll a 10-Year-Old Roth 401(k) Into a Brand-New Roth IRA at 65 and the Five-Year Clock Starts Over. Open the Roth IRA Five Years Before the Rollover, Even With $100 in It, and It Doesn’t

Workers who save in a Roth 401(k) often plan to roll the money into a Roth IRA at retirement, usually for more investment choices and simpler account management. The rollover itself is routine, but the attached timing rule can catch retirees off guard.

Treasury regulations run the Roth IRA’s five-year clock separately from the Roth 401(k)’s clock, so a worker who rolls a decade-old Roth 401(k) into a brand-new Roth IRA at 65 therefore starts a fresh five-year count. A worker who opened such an account years earlier, even with a small deposit, keeps that older start date and skips the wait.

Two Five-Year Clocks That Never Sync

Federal tax law sets up two separate tests. The first is that a Roth 401(k) distribution is qualified only if it comes after a 5-taxable-year period that begins with the worker’s first designated Roth contribution to the plan. A Roth IRA has its own 5-taxable-year period beginning with the first taxable year for which the individual made a contribution to a Roth IRA. An important caveat is that both tests also generally require the owner to be at least 59½.

Treasury’s regulation coordinating the two accounts says the IRA period and the 401(k) participation period “are determined independently”. If a rollover creates someone’s first Roth IRA, the IRA clock begins with the taxable year in which a rollover contribution from a designated Roth account is made to a Roth IRA. Ten years in a 401(k) doesn’t count toward the IRA clock.

How a $100 Roth IRA Locks In an Earlier Start Date

The Roth IRA clock starts on the first day of the individual’s taxable year for which the first regular contribution is made to any Roth IRA. Each owner has only one 5-taxable-year period covering all of their Roth IRAs. The rule looks only at the first contribution date. A small deposit made years before retirement sets the same start date as a large one would.

The calendar also works in the saver’s favor. Treasury’s example says a first contribution made between January 1, 1998, and April 15, 1999, for 1998 starts the period on January 1, 1998. A contribution made in April therefore backdates the clock by more than a year.

The regulation also shows what that head start is worth. A worker over 59½ rolled Roth 401(k) money in 2008 into the Roth version of an individual retirement account established in 2003. Any later withdrawal of the rolled-in money and its earnings was tax-free, because the older IRA had already passed the five-year test.

What the Reset Actually Costs a 65-Year-Old

For most retirees, the cost of starting late is smaller than they might expect. If the Roth 401(k) payout is already qualified, as it would be after 10 years in the plan and after age 59½, Treasury treats any qualified distribution from a designated Roth account rolled over into a Roth IRA as a regular contribution. Taking out up to that amount is not includible in gross income, even while the new clock is still running.

The at-risk portion is growth after the rollover. In Treasury’s example, an early withdrawal is taxable to the extent it exceeds the amount rolled in. Ordering rules reduce the hit, because withdrawals come from regular contributions first and from earnings last. A retiree taking modest annual withdrawals would use up the rolled-in amount long before reaching the taxable layer. The exposure falls mostly on people who need to empty the account within five years.

Age limits the damage further, as the 10% additional tax on early distributions does not apply to payouts made on or after the date on which the employee attains age 59½. A 65-year-old taking a nonqualified distribution owes ordinary income tax on the earnings portion and no penalty.

The stakes go up when the Roth 401(k) is newer. If the 401(k) payout fails its own five-year test, only the worker’s contributions carry over as contributions. Any early withdrawal that exceeds the portion of the rollover contribution that consisted of investment in the contract becomes taxable. Investment gains from the 401(k) then land in the taxable earnings layer.

Steps That Protect the Rollover Before Retirement

1. Fund the Roth individual retirement account at least five tax years before the planned rollover. Any amount starts the clock, and a contribution made by the filing deadline counts toward the prior year. Workers whose income is too high for direct contributions can still start the clock with a conversion, because the period also begins with the first conversion contribution.
2. Confirm the Roth 401(k) payout is qualified before rolling it. Once it is, the whole balance counts as contributions in the IRA, which caps the exposure at future growth.
3. Keep the IRA open. The start date carries over to any Roth IRA the individual has, so a small, older account keeps protecting every rollover that comes after it.

A decade in a Roth 401(k) protects the dollars that leave the plan, but it does nothing for the growth that follows. Only a Roth IRA opened years in advance protects that growth from the day of the rollover, and a $100 deposit is enough to start the clock. The same quiet years before required withdrawals begin are also when conversions are cheapest, something we sized up in a free Roth Window guide.

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