Hi, my name is Michael Carrico and I’m a Wealth Manager with Howe & Rusling. Today I’m going to talk to you about the importance of pre-retirement planning around Roth assets held in your employer retirement plans.

It’s common knowledge that Roth assets are a powerful savings tool that provide tax-free income in retirement. But a lot of people don’t understand the difference between Roth IRAs and Roth 401k and 403b plans. If you have a large Roth 401k or Roth 403b balance and you don’t have a Roth IRA yet, you’ll want to listen to the rest of this video.

The Roth Rules

Before we go too far, let’s take a quick look at the Roth rules. With any Roth accounts there are two important factors that must be met to receive your earnings tax-free. First, you must reach a qualifying event. For most people this will be reaching the age of 59.5, although some other events will qualify as well. The second factor is satisfying your 5-year Roth clock, and this is where the tax problem hides. Your Roth IRA, Roth 401k and Roth 403b all have a different clock, and this could lead to some unexpected problems with your retirement income plan.

Let’s look at these different account types.

Roth IRAs

We’ll start with Roth IRAs. These are separate from any employer. You can start a Roth IRA by contributing or by completing a Roth conversion. When you do either of these your 5-year Roth clock starts on January 1st of the tax year of the contribution or conversion. Every Roth IRA you own shares the same clock no matter how many accounts you have. This is nice and easy.

Roth 401k and Roth 403b Accounts

With Roth 401k and 403b accounts, however, each employer plan has its own separate Roth clock. Let’s look at a hypothetical scenario to make it easier to understand why this could be a problem.

A Roth 401k Example

Bob has been saving in a Roth 401k his entire career. It’s been well over 5 years since his first Roth contribution and he retires at age 59.5. No problem here. Bob can take withdrawals directly from his 401k and the earnings on the Roth portion are tax-free.

But Bob wants greater flexibility with retirement income planning, so he decides to rollover his 401k assets. He rolls his pre-tax assets to a Traditional IRA and his Roth assets into a Roth IRA. However, Bob never established a Roth IRA before now. Unfortunately, all that time Bob’s money was in his 401k doesn’t carry over to his new Roth IRA. His 5-year clock just started over and any earnings he withdraws from that Roth IRA for the next 5 years will be taxable.

Bob could have avoided this problem simply by starting a Roth IRA at age 54 or earlier. If he had done this, then at age 59.5 his Roth IRA would be more than 5 years old and the Roth money he rolled over from his 401k would use his existing Roth IRA clock to qualify. He would meet both rules and get his earnings tax free with no nasty surprises.

If you find yourself in Bob’s situation, don’t panic. There is still some good news.

What to do if you’ve already retired and rolled your Roth 401k into a Roth IRA

If you’re already at retirement or less than 5 years away, you can still start a Roth IRA to get the clock ticking. You may just need to adjust your plans a bit and delay a rollover until you reach the 5-year mark for your Roth IRA.

If you’re already in retirement and already rolled over that Roth 401k to a Roth IRA, then you can’t take it back. However, your withdrawals will come from your contributions first and those are available to you tax free. That may be enough to meet your needs until that Roth IRA clock hits 5 years.

Roth rules are complex and just one of many considerations as you approach retirement. If you aren’t sure about your situation, it may be time to speak with a financial professional to help you develop a plan.

I hope this information has been helpful and thank you for watching.