Your Roth 401(k) Isn't Really A Roth 401(k)

Roth IRAs and Roth 401(k)s are some pretty powerful tools for retirement planning. They allow you to invest post-tax money now and withdraw both your contributions and their earning tax-free when you retire. These plans are especially great for young people who, presumably, have a long time until they retire because they can have years of tax-free earnings growth.

I participated in a company Roth 401(k) at the last couple of jobs I had. Last month, I went through the process of moving those old 401(k) plans into my IRAs. This is a process called a "roll over" and, provided the money is moved directly from the 401(k) into an IRA, there are no tax consequences.

Why would someone do this? Typically, it's to reduce fees, to get greater investment choice, and to consolidate accounts after leaving a company to make them easier to manage. As I went through this process, I discovered something:

My Roth 401(k) was not entirely a Roth 401(k).

By that, I mean not all the money in my account qualified to roll over to a Roth IRA. It turns out, employer matching contributions to a Roth 401(k) are actually made into a traditional 401(k). In other words, those contributions and earnings are NOT growing tax free.

If your 401(k) statement is anything like mine, it doesn't mention this anywhere. It was only when I went to roll over my funds into my IRA that I discovered this.

So if you have a Roth 401(k) and want to roll it over to an IRA, you'll actually have to roll it over into two IRAs - a Roth IRA for your contributions and a traditional IRA for your employer's contributions. Your 401(k) provider will be able to tell you how much of your 401(k) will go into which account.