Roth 401(k) plans have been around for a while now, but here’s something you want to keep in mind about these accounts. When you leave your employer, generally speaking, you should always rollover your Roth 401(k) to a Roth IRA. There may be a few exceptions, but that’s the general advice.

This is primarily due to the Required Minimum Distribution (RMD) requirement that is placed on Roth 401(k) accounts… unlike a Roth IRA, the owner of a Roth 401(k) is required to take minimum distributions (RMDs) beginning at age 72, just like traditional 401(k) and IRA plans. Therefore, at some point before age 72 (often upon separation from service) the owner of the Roth 401(k) should rollover the account to a Roth IRA. But see the caution below!!

Roth IRAs do require the beneficiary to take RMDs after the death of the primary owner, but the distributions are tax free, as would be expected. But otherwise, during the life of the primary owner of the account, there is no RMD required.

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A Word of Caution

The Roth 401(k) (and Roth IRA) both require you to have held the account for five years, and a triggering event must have occurred (such as reaching age 59½), before the distribution is qualified and therefore tax-free. The tricky part is that the time in the Roth 401(k) doesn’t count toward time held in a Roth IRA.

So, if you roll over the Roth 401(k) account before you’ve met the five year requirement, all the time that you’ve held that account is wiped out, and the time you’ve held the Roth IRA is the new holding period. If you put the funds into a new Roth IRA, you will have to wait another five years before you can take the money out in a qualified fashion.

If you’d held the Roth 401(k) for five years or longer and a triggering event has occurred, rolling the funds over to a Roth IRA (of any age) allows you to withdraw the funds at any time, for any purpose, without tax.