Roth 401(k) to a Roth IRA: Beware the complexities

The highs that the S&P 500 reached this week may encourage more investors back into the stock market. If you've maxed out on your traditional 401(k) and want to sock away even more, see if your employer offers a Roth 401(k). Unlike with a regular Roth IRA, people of any income can contribute to a Roth 401(k). It only allows for post-tax contributions, but that money then grows tax-free.

Eventually, though, when you leave the employer sponsoring the Roth 401(k), you may want to roll over that money into a Roth IRA to take advantage of more investment choices or lower fees than in your 401(k). And if you then want to withdraw money from your Roth IRA, you'll need to follow certain rules to avoid taxes and penalties for early withdrawals.

IRS rules say you generally must be at least 59½ and hold a Roth IRA for five years for all distributions to be tax- and penalty-free.

You can take tax-free distributions from a Roth IRA equal to your contributions, including those rolled over from a Roth 401(k), regardless of your age. But to avoid a 10-percent penalty on the distributions of Roth earnings, you generally must be age 59½.

And to avoid taxes on distributions of Roth earnings, you must be age 59½ and wait five years from Jan. 1 of the year you first set up and contributed to the Roth IRA.

Fortunately, that five-year clock isn’t reset for later contributions to your Roth IRA.