Roth Catch-Ups Are Here. Do You Know the Rules for Getting the Money Out?
Perspective Matters
KEY TAKEWAYS
Starting in 2026, employees age 50 and older whose prior-year Social Security wages from the employer sponsoring the plan exceeded $150,000 (2025 wages, for 2026) must make their 401(k) catch-up contributions as Roth. If the plan has no Roth option, those employees can’t make catch-ups; everyone else is unaffected.
A Roth withdrawal is tax-free only when it’s qualified: the 5-year clock is satisfied and you’re 59½ or older, disabled, or deceased. Roth IRAs also allow a first-time home purchase (up to $10,000).
Roth IRAs and Roth 401(k)s run on separate 5-year clocks, and time in a Roth 401(k) doesn’t carry over to a Roth IRA. Each Roth conversion has its own clock, too.
Rollovers and job changes are where mistakes happen. A non-qualified Roth 401(k) rollover sends earnings into the Roth IRA’s “earnings” bucket, and a direct transfer to a new Roth 401(k) can preserve your clock only if your start year is recorded correctly.
As we start the fourth quarter, I want to talk about Roth IRAs and Roth 401(k)s. Most people are somewhat familiar with Roth IRAs, but far fewer know much about the Roth option inside a 401(k). Roth 401(k)s haven’t been around as long, and starting in 2026 they matter more than ever. Under SECURE 2.0, if you’re age 50 or older and your Social Security (FICA) wages from the employer sponsoring your plan were more than $150,000 in the prior year, your catch-up contributions, including the higher “super” catch-up for ages 60–63, must be made as Roth contributions. For 2026, that means your 2025 wages from that employer. If your wages were below the threshold, the requirement doesn’t apply to you, and you can still make pre-tax catch-up contributions if your plan allows them. If you are subject to the requirement and your plan doesn’t offer a Roth option, you can’t make catch-up contributions at all. Compliance in 2026 is judged on a reasonable, good-faith standard, and the final regulations take full effect in 2027.
More Roth money in more 401(k)s means more people will soon be facing the rules for taking it out, and that’s where the traps are. There’s plenty of information about getting money in. There’s not nearly enough about getting it out, so it’s time to learn the rules.
QUALIFIED VS NON QUALIFIED DISTRIBUTIONS
First, let’s talk about how to tell whether a distribution is qualified or non-qualified. This matters because there may be taxes or penalties on non-qualified distributions.
Here are the similarities and differences between Roth IRAs and Roth 401(k)s. For a distribution from either one to be qualified, two things must be true: you’ve satisfied the 5-year clock (more on that below), and you are age 59½ or older, or the distribution is due to your death or disability. A Roth IRA allows one other qualifying event that a Roth 401(k) does not: a first-time home purchase, up to a $10,000 lifetime limit.
| Roth IRA | Roth 401(k) |
Qualified if 59½ or older, disabled, or deceased (plus 5-year clock) | Yes | Yes |
First-time home purchase (up to $10,000 lifetime) | Yes | No |
How many 5-year clocks | One, for all of your Roth IRAs combined | A separate clock for each employer plan |
When the clock starts | January 1 of the tax year of your first contribution to any Roth IRA | January 1 of the year of your first Roth contribution to that plan |
Non-qualified distributions | Ordering rules: contributions, then conversions, then earnings | Pro-rata split of contributions and earnings |
THE FIVE YEAR CLOCKS
You may have heard about the five-year clock for Roths. Be forewarned: Roth IRAs, Roth 401(k)s, and Roth conversions each have their own clock, and the rules for each are different.
The Roth IRA clock
For a Roth IRA, it’s a one-time “5-year forever” clock, and it’s based on the tax year, not the calendar year. If you make a Roth IRA contribution for a tax year, even if you make it as late as the tax filing deadline the following April, you get credit for that tax year. So a contribution for tax year 2026 made on April 15, 2027 counts as if you made it on January 1, 2026, and 2026 is the first year of your clock. (You choose the tax year when you make the contribution, so make sure it’s designated the way you intend.) The fifth year ends December 31, 2030, so qualified distributions can begin in 2031.
Each person only has to satisfy the “5-year forever” clock once. After that, if you meet one of the other requirements above, any and all distributions from all of your Roth IRAs will be qualified, and therefore tax and penalty free. (I’ll explain the rules for non-qualified distributions in a minute.) So if you open a Roth IRA with $100 and designate it as a 2026 contribution, you will have satisfied the clock at the end of 2030, even if you never add another dollar. That’s a good reason to open a Roth IRA early, even with a small amount.
The Roth 401(k) clock
Roth 401(k)s are not included in the Roth IRA clock. Every employer’s Roth 401(k) has its own 5-year clock, which starts on January 1 of the year of your first Roth contribution to that plan. And the years you spend in a Roth 401(k) do not carry over to a Roth IRA. This becomes important if you change employers and are considering rolling your Roth 401(k) into a Roth IRA. If your Roth 401(k) hasn’t met its own 5-year rule, the rollover is a non-qualified distribution, and the earnings from the Roth 401(k) go into the “earnings” bucket of the Roth IRA instead of the “contributions” bucket. Keep reading to learn why that matters, and for an important opportunity to keep your Roth 401(k) clock ticking.
The conversion clock
Notice I haven’t mentioned conversions yet. That’s because each Roth IRA conversion has its own 5-year clock, and it works differently. It only matters for the 10% additional tax on early withdrawals: if you’re under age 59½, withdrawing amounts that were taxable when converted within the conversion’s five-year tax period may trigger the 10% additional tax unless an exception applies. Once you’re 59½ or older, the conversion clock no longer matters. (Note that the conversion clock begins on January 1 of the year in which you make the conversion.)
ROTH IRA DISTRIBUTION ORDERING RULES
First, if a distribution is qualified (see the rules above), the ordering rules DO NOT MATTER. A distribution is non-qualified if the 5-year clock hasn’t been met, or if none of the qualifying events applies. In those cases, the ordering rules decide what comes out first.
The rules are pretty straightforward, and they’ll also be relevant for non-qualified rollovers from a Roth 401(k), so think of there being three “buckets” of money inside a Roth IRA:
Contributions
Conversions
Earnings
If you are withdrawing from a Roth IRA, regardless of how many Roth IRA accounts you have, you will always withdraw contributions first. From the IRS’ perspective, you have only one Roth IRA, so you aggregate your total contributions, your total converted dollars, and your total earnings as if they were in one account. In my experience, custodians haven’t always been diligent about tracking these buckets, and they definitely won’t be helping you track multiple accounts. According to the IRS, it is the taxpayer’s responsibility to track (read: prove, if you need to) the details about your Roth IRAs, so keep notes and statements showing your contributions and conversions.
You may always withdraw your contributions without tax or penalty. Whether you may withdraw converted amounts without penalty depends on 1) your age, and 2) when you did the conversion. If you are over 59½, you may withdraw converted amounts any time without tax or penalty. If you’re under age 59½, the 10% additional tax may apply to taxable converted amounts withdrawn within the conversion’s five-year period, unless an exception applies. Conversions generally come out oldest first, and within each year, taxable amounts come out before non-taxable amounts (IRS Publication 590-B).
Earnings come out last. Unless the distribution is qualified, earnings are taxable when withdrawn, and if you’re under 59½ the 10% penalty may apply as well unless an exception applies.
ROLLING A ROTH 401(K) INTO A ROTH IRA
As I mentioned, Roth 401(k)s have different rules than Roth IRAs. When you take a non-qualified distribution from a Roth 401(k), it’s split pro rata between your contributions and your earnings. (That’s a different pro-rata rule from the one that applies to traditional IRAs.)
As a reminder, for a distribution from a Roth 401(k) to be qualified, you must be 59½ or older, disabled, or deceased, AND the Roth 401(k) must have been held for at least 5 years.
Here’s where the Roth 401(k) rules start to get interesting. If you have met the rules for a qualified distribution, you may roll your Roth contributions plus earnings into your Roth IRA, and all of it goes into the “contributions” bucket. That means you could take the money out of your Roth IRA right away without tax or penalty. However, if the distribution is non-qualified when you roll it over, only your contributions go into the “contributions” bucket. The earnings go into the “earnings” bucket, which means that if your Roth IRA doesn’t satisfy its own 5-year clock, any earnings you withdraw could be subject to taxes and penalties. And if you’ve never had a Roth IRA, the rollover starts your Roth IRA clock from scratch.
Keeping your Roth 401(k) clock ticking
Earlier I mentioned an opportunity to keep your Roth 401(k) clock ticking. Here’s how it works. Each employer’s Roth 401(k) has its own 5-year clock. But what if you leave an employer after contributing to the Roth 401(k) for two years? If your new employer also offers a Roth 401(k), you can keep the “seasoning” of your Roth money by doing a direct trustee-to-trustee transfer from your old employer’s plan to the new one. (It has to be a direct transfer, not a check made out to you.)
It’s important that your former plan properly informs the new plan of the year you started contributing. The regulations require the old plan to send the new plan a statement within a reasonable period and no later than 30 days after the transfer, but in practice, timing varies. Even though they’re supposed to do it automatically, don’t assume. When you process the transfer, put your request to send your start date in writing. Then check with the new plan to make sure it has the correct date recorded. If you can see it on their website, save a copy as a PDF. If you can’t see it, call, and if they tell you they have the right date, ask them to confirm it in writing. Keep your statements from the former employer showing when you started contributing, just in case.
PUTTING IT ALL TOGETHER
Roth IRAs and Roth 401(k)s offer an opportunity to accumulate retirement savings and, when the rules are followed, take the earnings out without paying taxes. But the rules for getting money out are specific, and they’re different for each account. Mistakes in applying them often can’t be fixed, so getting it right the first time matters.
As CFP® professionals who are members of Ed Slott’s IRA Advisor Groups (Master Elite for me, Elite for my colleague Brianna), we spend our days at Prism Planning and Solutions Group on the rules for getting money out of IRAs and retirement plans. We like to coach and educate, and we can help you understand your specific situation, avoid costly mistakes, and use accounts like these to your advantage.
Whether you’re already a client, you’re thinking about working with us, or you manage your own investments and just want a knowledgeable second opinion, we’re happy to be your sounding board. Sometimes the answer is “you’re doing it exactly right,” and that’s worth knowing before you act.
READY TO GET STARTED?
Schedule an Introductory Meeting here to discuss your financial situation and get clarity on your Roth IRA and 401(k) options. There’s no obligation—just an opportunity to get answers to your questions and see if working together makes sense for you.
DISCLAIMERS
Julia Peloso-Barnes is a CFP® and a member of Ed Slott's Master Elite IRA Advisor Group™. Brianna Melahn is a CFP® and a member of Ed Slott's Master Elite IRA Advisor Group™. Julia is the founder of Prism Planning and Solutions Group, a dba of PPSgrp LLC, an SEC-registered investment adviser. This article is for educational purposes only and does not constitute personalized investment, tax, or legal advice. Investing involves risk, including the possible loss of principal; past performance is not indicative of future results. The information in this article draws on third-party sources, data, and publicly available research. While we've made every effort to ensure its accuracy, we cannot guarantee or warrant that it is complete, current, or error-free, and it should not be relied upon as the sole basis for any financial decision. Prism Planning and Solutions Group is not responsible for errors or omissions in third-party content. Please consult with your adviser before acting on any information presented here.
CFP®, Certified Financial Planner™, and the CFP® logo are certification marks owned by the Certified Financial Planner Board of Standards, Inc., and awarded to individuals who meet its education, examination, experience, and ethics requirements.
Subscribe HERE to receive alerts when new posts are published.
