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If I have set my 401(k) up such that my contributions go to my Roth 401(k), my employer's matching contributions are still made pre-tax and go to my "traditional" 401(k).
Can I roll these pre-tax contributions made by my employer into my Roth 401(k)? Or into any Roth IRA? If so, are there any major disadvantages to doing this?
what you are looking for is an in-plan conversion
A plan with a designated Roth program can allow rollovers to a designated Roth account from another account in the same plan (an “in-plan Roth rollover”). Designated Roth accounts can’t be set up solely to accept in-plan rollovers - they must also accept elective deferrals from participants.
So this means your employer may allow an in-plan conversion.
Amounts eligible for in-plan Roth rollovers
Any vested plan balance, including earnings, can be rolled over to a designated Roth account. The amount doesn’t have to be eligible for distribution; however, the rollover must be direct (not a 60-day rollover) if the amount is not otherwise eligible for distribution.
A plan can allow in-plan Roth rollovers of:
- elective salary deferrals
- matching contributions
- nonelective contributions
- after-tax employee contributions
- amounts rolled into the plan from another plan
- qualified matching contributions (QMACs)
- qualified nonelective contributions (QNECs)
The plan can specify which of these amounts are eligible for in-plan Roth rollovers and how often these rollovers can be done.
The key here is that it is only the vested portion. That means you might not be able to rollover all the matching funds, unless you have been in the program long enough to be 100% vested in the company match.
Again the company has a choice as to what sources of funds they will allow an employee to rollover.
Now for the cost:
Participant’s tax consequences
An in-plan Roth rollover usually results in taxable income to the participant. A typical rollover from a pre-tax account will result in the entire amount of the rollover, including earnings, being included in gross income. The amount includible in gross income for the year of the rollover is:
- the amount rolled over, less
- any basis in the amount transferred.
Participants may want to increase their tax withholding amount or make an estimated tax payment for the period in which the in-plan Roth rollover is completed.
The additional 10% early withdrawal tax doesn’t apply to the amount of an in-plan Roth rollover. However, the distribution may be taxable and subject to the additional early withdrawal tax if the participant withdraws it from the designated Roth account within five years (see the FAQs).
So yes your employer may allow it. It can make sense if you are early in your career, or the amount of the amount to be converted is small. You also have to have the funds for the taxes outside the 401(k).
Short answers: No, you can’t roll over your employer’s matching contributions into your Roth 401(k) plan. You can’t roll them over into a Roth IRA while you are still employed. When you are no longer with your current employer, rolling over pretax money into a Roth IRA is a taxable event.
