What is a Roth 401(K)?

A relatively new retirement plan option in employer sponsored retirement plans is the Roth 401(K). Instead of making contributions on a pre-tax basis when you contribute to your traditional 401(K), the Roth 401(K) must be funded with after tax money. The advantage of forgoing reducing your taxable income for this tax year is that all the growth can be withdrawn tax free during your retirement years. The more time prior to retirement that you have to invest in a Roth 401(K), the more favorable this strategy will be. When you retire, you would then consider rolling the this type of plan into a Roth IRA. 

However, there is a catch. Unless you already have a Roth IRA, there is a five year waiting period in the Roth IRA prior to making tax free withdrawals (assuming that you are over the age 59½). Therefore, it is advisable to open either a contributory Roth IRA or convert a portion of a traditional IRA to a Roth IRA at least five years before you plan to rollover the Roth 401(K) and start taking distributions. This way when you retire, you can rollover the Roth 401(K) and begin taking tax free distributions without waiting.

If you are considering rolling over money from an employer-sponsored plan, such as a 401(k) or 403(b), you may have the option of leaving the money in the current employer-sponsored plan or moving it into a new employer-sponsored plan. Benefits of leaving money in an employer-sponsored plan may include access to lower-cost institutional class shares; access to investment planning tools and other educational materials; the potential for penalty-free withdrawals starting at age 55; broader protection from creditors and legal judgments; and the ability to postpone required minimum distributions beyond age 70½, under certain circumstances. If your employer-sponsored plan account holds significantly appreciated employer stock, you should carefully consider the negative tax implications of transferring the stock to an IRA against the risk of being overly concentrated in employer stock. You should also understand that Commonwealth and your financial advisor may earn commissions or advisory fees as a result of a rollover that may not otherwise be earned if you leave your plan assets in your old or a new employer-sponsored plan and that there may be account transfer, opening, and/or closing fees associated with a rollover. This list of considerations is not exhaustive. Your decision whether or not to roll over your assets from an employer-sponsored plan into an IRA should be discussed with your financial advisor and your tax professional.


If a Commonwealth advisor provides investment advice to the plan sponsor (or to plan participants) for your retirement plan, the advisor may only describe your ability to withdraw funds from your retirement plan; to roll those funds over into an IRA, including an IRA not affiliated with Commonwealth; and to educate you concerning rollovers in general. The advisor may not recommend, but may educate you concerning, an IRA affiliated with Commonwealth because the fees or commissions generated from the rollover assets would create a conflict of interest for the advisor.