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In-Service Roth 401(k) Rollover

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  • In-Service Roth 401(k) Rollover

    I've found only limited information on the internet regarding this topic. From what I've read it is dependent on your plan administrator and whether or not they allow it.  Does anyone here currently performs or has performed an in-service Roth 401(k) rollovers into a Roth IRA account? That is, perform these rollovers while you are still currently employed and actively working. I've read that these rollovers are usually done after leaving an employer or in retirement. If one is able to do this during their working years wouldn't this be very beneficial having most of their money in a Roth IRA account and thus avoiding RMDs from a Roth 401K in retirement? However, would this be any different from taking your entire Roth 401k once you retire and rolling over the entire lump sum all at once?

  • #2
    You are confusing different issues and combining them into one.

    • IRS regulations prohibit the in-service withdrawal/rollover of non-vested employer contributions and both traditional or Roth 401k deferrals.

    • There are two fairly recent innovations in employer retirement plans. An employer plan can but is not required to allow employee after-tax contributions. It is important to note that unlike Roth deferral earnings, earnings on employee after-tax contributions are pre-tax.

    • You can take advantage of one and/or the other of the below options depending on the plan.

      1. In-plan Roth Rollover (IRR): A plan may but is not required to allow a participant to rollover both pre-tax and after tax assets into the Roth Designated account. After-tax contributions rolled over are not subject to taxation, but their earnings and any pre-tax contributions and earnings rolled over are subject to ordinary income tax.

      2. The so called Mega Backdoor Roth: A plan may but is not required to allow a participant to make in-service withdrawals/rollovers of rollover contributions, vested employer contributions, employee after-tax contributions and all their respective. In IRS Notice 2014-54 the IRS allowed the rollover of just the after-tax account without requiring pro rata distributions from other distributable accounts/assets. Note: This does require the pro rata distribution of the after-tax contributions and earnings within the after-tax account.

    • So there are two useful options for people allowed to make after-tax contributions.

      1. IRR: Rollover both the contributions and earnings to the Roth Designated account. The contributions will not be taxed, but the earnings will be.

      2. Mega Backdoor Roth: Either rollover both the contributions and earnings to a Roth IRA.  The contributions will not be taxed, but the earnings will be. Or rollover the contributions to a Roth IRA and the earnings to a traditional IRA. There will be no tax liability for either.