A Roth 401(k) works like a traditional 401(k) plan, in that contributions are made through paycheck deferrals and assets held within the plan are tax deferred until they are withdrawn in retirement. However, a Roth 401(k) plan is a post-tax option; contributions provide no upfront reduction to taxable income. Instead, Roth 401(k) contributions and earnings are tax-free when taken out after age 59.5. Once you leave your job with an employer offering a Roth 401(k) plan, you can leave it with the plan sponsor, transfer it to a new employer plan, roll it over into an individual Roth IRA or take a cash distribution.
The majority of Roth 401(k) plan sponsors allow you to leave your account with them after leaving your job. You no longer have the option to contribute directly to the plan, and you are limited to the investment options the plan provides.
In some cases, you can transfer your Roth 401(k) plan balance to a new employer's plan. A transfer option is only available when your new employer offers a Roth 401(k) option, and the new plan allows transfers in. Once a transfer is complete, the previous employer's Roth 401(k) is closed, and your entire balance is held with the new plan. You are still limited to the investment options of the new plan.
Roll It Over
A rollover is an option for your Roth 401(k) balance, either with the initial plan sponsor or a new financial institution of your choice. A rollover transitions the Roth 401(k) balance into an individually held Roth IRA through a tax-free transfer. Under this option, you gain more control over your investment selections, and you have the opportunity to contribute if you are eligible.
Cash It Out
You may also take a cash distribution from your Roth 401(k) once you leave your job. There are, however, tax implications with a distribution if you are under age 59.5, and you no longer have these Roth assets available in retirement.