Older Than 59? Get Your Roth Out of Your 401(k) Now!

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Roth IRAs are amazing tax saving tools. Roth IRAs allow investors to grow their money tax-free.

Even though there is no deduction for contributions, a Roth IRA provides the dual benefits of tax-free accumulation throughout your life and tax-free distributions after age 59 1/2. The long-term benefits can be significant.

We suggest you fund your Roth IRA even when you can’t afford it and that you use taxable savings as your seed money. If you have an employer sponsored retirement plan with a Roth option, such as a 401(k), 403(b), or 457 plan, we recommend funding the Roth side.

After you reach the age of 70 1/2, the IRS requires you to begin taking minimum distributions from your traditional retirement accounts called a Required Minimum Distribution (RMD). Individual Retirement Accounts (IRAs) such as Traditional IRAs, SEP IRAs, and SIMPLE IRAs are all subject to required minimum distributions (RMDs) in the year you will reach age 70 1/2.

Roth IRAs are not subject to RMDs.

If you do not own the company, employer sponsored plans like 401(k), 403(b), and 457 plans are only subject to RMDs in the year you both reach age 70 1/2 and are terminated from your employment with the sponsoring employer. If you are more than a 5% owner of the company that sponsors the plan, then you must start RMDs in the year you reach age 70 1/2 regardless of whether you are still employed.

Anyone who has to take RMDs from their employer sponsored retirement plan, sadly, has to take RMDs from all components of the plan. This includes traditional employee deferrals, profit sharing, employer match, and even Roth deferrals!

As the IRS says in their FAQs:

What types of retirement plans require minimum distributions?

The RMD rules apply to all employer sponsored retirement plans, including
profit-sharing plans, 401(k) plans, 403(b) plans, and 457(b) plans. The RMD rules also apply to traditional IRAs and IRA-based plans such as SEPs, SARSEPs, and SIMPLE IRAs.

The RMD rules also apply to Roth 401(k) accounts. However, the RMD rules do not apply to Roth IRAs while the owner is alive.

If you are “out of service,” meaning after your termination or retirement date with the firm, you are allowed to perform an IRA Rollover to extricate your assets out of your employer’s plan and into an Individual Retirement Account (IRA) at a custodian of your choosing.

Also, if you are older than 59 1/2, the IRS rules allow you to roll out your employer plan funds even if you are still “in service,” meaning you are still employed with that company.

For this reason, if you are older than age 59 1/2, I recommend that you rollover at least your Roth assets to Roth IRA so that you have no chance of those assets being subject to RMD rules.

While you are at it, you could consider rolling out some of your other funds. Reading “When to Get Your Money Out of Your 401(k), Especially Plan Owners” might help you decide how much to roll out.

When performed correctly, simply moving the assets out of your employer plan and into the proper IRA is not a taxable event. However, you have to make sure you do it properly. We have a guide on how to do that here: “How to Rollover Your 401(k) into a Schwab Institutional Intelligent Portfolio with Marotta Wealth Management.”

Photo by Fabio Comparelli on Unsplash

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.