3783 / Can the owner of a designated Roth 401(k) or 403(b) account roll those funds into another retirement account?

A rollover of a designated Roth account distribution that is not includable in income may be made only to another designated Roth account of the individual from whose account the payment or distribution was made or to a Roth IRA of the individual either through a 60-day rollover or a direct rollover. A plan receiving a designated Roth account rollover must agree to separately account for the amount that is not includable in income. Furthermore, if such a rollover is made to another plan, it must be made as a direct rollover to assure that there is proper accounting in the recipient plan. In other words, a rollover to a plan is not available if the distribution has been made directly to the employee. In that case, however, an employee would have the option of rolling over the distribution to a Roth IRA within 60 days.¹If a rollover is made from a designated Roth account under another plan, the five-year period for the receiving plan begins on the first day that the employee made designated Roth contributions to the other plan, if earlier.²

If a rollover is made from a designated Roth account to a Roth IRA, the period that the rolled over funds were in the designated Roth account does not count toward the five taxable year period for determining qualified distributions from the Roth IRA. If the Roth IRA was established in an earlier year, the five-year period for determining qualified distributions from the Roth IRA applies to distributions of rolled over amounts.³ Furthermore, the entire amount of any qualified distribution rolled over to a Roth IRA is treated as basis in the Roth IRA. As a result, a subsequent distribution from the Roth IRA of that amount would not be includable in the owner’s gross income.⁴

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Planning Point: A client who does not have a Roth IRA and anticipates rolling over an amount from a designated Roth account to a Roth IRA should consider establishing a Roth IRA before the year the rollover is anticipated. This will start the five-year holding period.

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1. See IRC § 402A(c)(3); Treas. Reg. § 1.402A-1, A-5.

2. Treas. Reg. § 1.402A-1, A-4(b).