Your Roth 401(k) Options
A Roth 401(k) works like a traditional 401(k) plan in that contributions are made through paycheck deferrals and assets held within the plan are tax-deferred until they are withdrawn in retirement. However, a Roth 401(k) plan is a post-tax option; contributions provide no upfront reduction to taxable income. Instead, Roth 401(k) contributions and earnings are tax-free when taken out after age 59½.
Once you leave your job with an employer offering a Roth 401(k) plan, you potentially have four options about what to do with your plan:
- You can maintain it as is with the plan sponsor.
- You can transfer it to a new employer plan.
- You can roll it over into an individual Roth IRA.
- You can take a lump-sum cash distribution.
- If you leave your job, you can still maintain your Roth 401(k) account with your old employer.
- Under some circumstances, you can transfer your Roth 401(k) to a new one with your new employer. You can also choose to roll over your Roth 401(k) into a Roth IRA.
- You can cash out your Roth 401(k) and take it as a lump-sum payment, but this may have tax implications and penalties.
1. Leave It
The majority of Roth 401(k) plan sponsors allow you to maintain your account with them after leaving your job. However, you no longer have the option to contribute directly to the plan, and you are limited to the investment options the plan provides.
2. Transfer It
In some cases, you can transfer your Roth 401(k) plan balance to a new employer's plan. This option is only available if your new employer offers a Roth 401(k) plan that allows transfers. Once a transfer is complete, the previous employer's Roth 401(k) is closed, and your entire balance is held within the new plan. You will then be limited to the investment options of the new plan.
3. Roll It Over
A rollover is an option for your Roth 401(k) balance, either with the initial plan sponsor or with a new financial institution of your choice. A rollover transitions the Roth 401(k) balance into an individually held Roth IRA through a tax-free transfer. Under this option, you gain more control over your investment selections and have the opportunity to contribute additional funds if your annual income is below the legal threshold.
If you choose to cash out your Roth 401(k), you are reducing the amount of money available to you during your retirement.
4. Cash It Out
You may also take a lump-sum cash distribution from your Roth 401(k) once you leave your job. There are, however, tax implications with distributions if you are under age 59½. And, of course, if you cash out, you will lose the tax-free money your funds would have continued to earn until withdrawal and no longer have these Roth assets available to you in retirement.