Should I roll my Roth 401(k) into a Roth IRA?
Q.: Im thinking of retiring and rolling my Roth 401(k) to a Roth IRA. A co-worker says if I roll it to a Roth IRA, I cant touch it for five years without penalty. I thought penalties ended at 59. Im 68. Sam in Dallas  A.: Sam, Ill try. My suspicion is your coworker is mixing bits of different rules together. First, the penalty most people refer to with respect to IRAs, Roth accounts, and retirement plans is the 10% penalty assessed for taxable distributions prior to age 59 . There is also a five-year rule that affects conversions from traditional IRAs and retirement plan accounts to Roth accounts that can trigger a penalty but it, too, is only applicable prior to age 59. At 68, you do not need to worry about these penalties. Second, there is another five-year rule regarding earnings in a Roth IRA. It needs to be satisfied only once in a taxpayers lifetime. Before you can take earnings tax-free from a Roth IRA, you must be 59 years old AND it must be at least five tax years since the tax year for which you put the first dollar in your first Roth IRA. That first Roth IRA account does not even need to exist today. You are older than 59 so if your first Roth IRA was opened more than five years ago, you can access the earnings tax-free. This includes any funds you roll into the Roth IRA from your Roth 401(k). It is important to note that Roth 401(k)s are not the same as Roth IRAs. So, if you have never had a Roth IRA, you would be establishing your first Roth IRA with the rollover from the Roth 401(k). That starts your five-year clock for accessing earnings. That does not mean you cant touch it.  After the rollover, you can access any already taxed funds any time you want to tax free. These already taxed funds would be contributions made to the Roth 401(k) or conversions made in-plan. Only after distributing all the previously taxed amounts would you start to remove earnings from the account. If it has been less than five years since the start of your first Roth IRA when you distribute earnings, the earnings distributed will be taxed. If it has been five years since the start of your first Roth IRA, you will never pay taxes on any distributions. This five-year rule regarding earnings provides motivation for many to start Roth IRAs before retirement. Another motivator is the fact that Roth IRAs are not subject to Required Minimum Distributions (RMD) but Roth 401(k) accounts are subject to RMD at the later of age 72 or retirement, depending on the provisions in the plan. Of course, if your income is too high, you cannot contribute to a Roth IRA directly. To get that first Roth IRA going in such a case, people will typically look to take an in-service distribution to a new Roth IRA account if over 59 or convert traditional IRA money to a Roth IRA through a conventional conversion or a so-called back door Roth IRA.  If you have a question for Dan, please email him with MarketWatch Q&A on the subject line. Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide but with offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some questions are edited for brevity.