From Yahoo Finance: 2025-05-03 08:30:00

A reader seeks advice on rolling over an after-tax 401(k) to a Roth IRA with Schwab, concerned about potential taxes on earnings. Roth 401(k)s offer tax-free growth and withdrawals, but pre-tax contributions may be taxed. SECURE Act 2.0 allows employers to make pre-tax or after-tax matching contributions directly to Roth 401(k) accounts.

Contributions to Roth 401(k)s are funded with after-tax money and subject to annual IRS maximums. Withdrawals are tax-free if qualified, meeting a five-year rule and age requirements. Employers can choose pre-tax or after-tax matching contributions, affecting current and retirement income taxes.

Rolling over a Roth 401(k) to a Roth IRA is straightforward, avoiding mandatory tax withholding with a direct rollover. Pre-tax funds, like employer matches, will incur income taxes if rolled over to a Roth IRA. A financial advisor can help decide on the best approach for handling pre-tax funds within retirement savings.

Roth accounts have a five-year lock period, starting with the first contribution. If a Roth 401(k) is rolled over into a Roth IRA, the five-year clock transitions to the new account. Consult a financial advisor to navigate complex rules and tax consequences of breaking them. A direct rollover is recommended to avoid taxes on the rollover amount.

Planning for retirement can be complex, but working with a financial advisor can provide guidance on tax-efficient strategies. SmartAsset’s retirement calculator can help estimate savings growth and annual income in retirement. Keep an emergency fund for unexpected expenses in a liquid account, balancing inflation erosion with compound interest earnings.

Read more: Do I Owe Taxes When Rolling Over My Roth 401(k) to a Roth IRA? The Advice Seems Conflicting