How to Move Designated Roth Account Assets
By Jennifer Bassett, CIP, CISP, CHSP, QKA
For over two decades now, plan participants have been allowed to make designated Roth account contributions to 401(k) plans and 403(b) plans. Governmental 457(b) plans and the federal Thrift Savings Plan (TSP) have allowed this option since 2011. Since that time, many participants have been able to build up their designated Roth account balances. As plan participants approach retirement age, they may be unsure about their next steps and turn to you for guidance. See below for answers to common questions that your clients might have about designated Roth accounts.
Can plan participants roll over their designated Roth account assets to another retirement plan?
Yes. Plan participants may roll over eligible distributions from designated Roth accounts to the TSP or other 401(k), 403(b), governmental 457(b) plans that accept rollovers and separately account for Roth elective deferrals. In addition, many retirement plans allow plan participants to roll over (i.e., convert) their non-Roth assets into a designated Roth account within the retirement plan. This transaction is referred to as an in-plan Roth rollover (described below). TSP plan participants will have this option starting in January 2026.
Why would a plan participant choose to roll over assets to another retirement plan?
A plan-to-plan rollover typically occurs when an individual terminates employment with one employer, goes to work for a new employer, and moves the account balance from the former employer’s plan to the new employer’s plan.
What is the difference between a direct and an indirect rollover?
Plan participants may directly or indirectly roll over designated Roth account assets. In a direct rollover transaction, assets are moved directly from the distributing retirement plan to the receiving retirement plan. With indirect rollovers, assets are distributed to the plan participant who then, within 60 days, rolls over the assets to an eligible retirement plan.
NOTE: Plan administrators must withhold 20 percent of the taxable portion of an eligible rollover distribution that is not directly rolled over.
Plan administrators must address unique circumstances when completing plan-to-plan rollovers of designated Roth account assets. Options available could be influenced by whether the Roth assets are considered “qualified” at the time of rollover. A few considerations are mentioned below.
A retirement plan cannot accept rollovers of designated Roth account assets unless the receiving plan permits participants to make Roth elective deferrals.
Designated Roth account assets may be directly rolled over between employer-sponsored retirement plans that have a designated Roth account program. If not a qualified distribution, the basis and earnings portions are to be separately tracked in the receiving plan.
The earnings portion of a nonqualified Roth account distribution is the only portion of a designated Roth account that may be indirectly rolled over to another designated Roth account.
The entire direct rollover amount of a qualified designated Roth account distribution is treated as basis in the receiving retirement plan.
If the plan participant rolls over the entire designated Roth account balance and, at the time of the rollover, the designated Roth account balance is less than the investment (basis) in the Roth account because of losses, the participant will treat the amount of the investment, reduced by any previous Roth account distributions of basis, as contributions in the receiving plan. Thus, current or future earnings in the receiving plan generally will be treated as Roth contributions up to the amount needed for basis recovery.
Can plan participants roll over designated Roth account assets to Roth IRAs?
Yes. Many designated Roth account assets eventually will end up in Roth IRAs. Both the distributing and receiving entities must understand the regulations governing this movement of assets.
If a plan participant rolls over a nonqualified distribution from a designated Roth account, the nontaxable and taxable rollover amounts are still tracked, but the Roth IRA five-year period* applies. Credit is not given for the time of participation in the employer plan’s designated Roth program.
If a plan participant indirectly rolls over a portion of a Roth account distribution, the taxable portion (i.e., the earnings portion of a nonqualified distribution) is deemed rolled over first.
If a plan participant rolls over a qualified designated Roth account distribution, the entire amount of the rollover contribution is considered basis in the Roth IRA, regardless of whether the participant has met the Roth IRA five-year period.
Roth IRA distribution ordering rules always apply to Roth IRA distributions.
Rollovers from Roth IRAs to designated Roth accounts are prohibited.
Similar to plan-to-plan rollovers, if the plan participant rolls over the entire designated Roth account balance and, at the time of the rollover, the designated Roth account balance is less than the investment (basis) in the Roth account because of losses, the plan participant will treat the amount of the investment, reduced by any previous Roth account distributions of basis, as contributions in the Roth IRA. Thus, current or future earnings in the Roth IRA generally will be treated as Roth contributions up to the amount needed for basis recovery.
*The five-year period begins on January 1 of the year for which the Roth IRA owner makes a Roth IRA contribution of any kind to any Roth IRA.
What are In-Plan Roth Rollovers (IRRs)?
In-plan Roth rollovers (IRRs) allow plan participants to change the tax nature of pretax and non-Roth after-tax assets to designated Roth account assets. Plan permitting, a participant generally can roll over all non-Roth plan assets (e.g., elective deferrals, matching contributions, nonelective contributions, after-tax employee contributions, qualified matching contributions, qualified nonelective contributions, rollover contributions) to a designated Roth account.
Plan participants may make IRRs either directly or indirectly. With direct IRRs, the assets that are eligible for rollover are moved directly from a non-Roth account to the designated Roth account under the same plan. No assets leave the plan, so no actual distribution takes place and investments need not be liquidated.
NOTE: Although an actual distribution does not take place, plan administrators must still report direct IRRs on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
With indirect IRRs, the assets are actually distributed to the participant. The participant then has 60 days to roll back the assets into the same plan from which they were distributed. Because this is a true distribution that is eligible for rollover, mandatory 20 percent income tax withholding applies to any taxable amount. The IRS 10 percent early distribution penalty tax applies (if there is no penalty tax exception) to any taxable amount not rolled over.
Are IRRs Taxable?
Yes. Plan participants must include the taxable portion of an IRR in their gross income for the year of the distribution. The taxable amount is the value of the distribution reduced by the participant’s basis (e.g., after-tax or nondeductible employee contributions), if any. The 10 percent early distribution penalty tax does not apply to any IRR assets rolled over to the designated Roth account.
IRRs may be made only within a plan that contains a qualified Roth contribution program. The plan may amend to add IRRs as well as a Roth contribution program, but cannot initiate IRRs before making Roth elective deferrals available under the plan.
How are IRRs Reported?
The Instructions for Forms 1099-R and 5498, contain the reporting requirements for plan-to-plan rollovers, designated Roth account-to-Roth IRA rollovers, and IRRs.
