Roth 401(k) and Roth 403(b) accounts have become popular, and starting in 2026 they'll grow faster than ever. A new SECURE 2.0 rule is pushing many higher earners' catch-up contributions into Roth accounts. Most savers understand the basic promise: pay tax now and withdraw tax-free later. Fewer understand that the "tax-free later" part depends on a five-year clock. That clock doesn't always travel with your money when you leave your employer.
If you hold a sizable Roth 401(k) or Roth 403(b), especially one with a lot of growth, one small step taken today could protect you from an unexpected tax bill later. That step is opening a Roth IRA, even with a modest amount.
Two Accounts, Two Separate Five-Year Clocks
To withdraw earnings tax-free, a Roth distribution must be "qualified." That generally means you're at least 59½ (or disabled, or the distribution follows your death) and the account has met a five-year holding requirement.
This is the part many people miss. Your Roth 401(k) and your Roth IRA each have their own separate five-year clock.
Your Roth 401(k) clock starts on January 1 of the year you made your first Roth contribution to that specific plan. Your Roth IRA clock starts on January 1 of the first year you contributed to any Roth IRA. Once the Roth IRA clock is satisfied, it's satisfied for every Roth IRA you'll ever own.
The Rollover Trap
When you retire or change jobs, rolling your Roth 401(k) into a Roth IRA often makes sense. You get more investment choices, simpler consolidation, and the Roth IRA's favorable withdrawal rules. But the years your money spent in the Roth 401(k) do not carry over to the Roth IRA. After the rollover, the Roth IRA's clock is the one that counts.
If you already have a Roth IRA that has been open for five years, this is a non-issue. Your rolled-over money can be qualified right away. If you don't have a Roth IRA, the rollover itself opens your first one, and your five-year clock starts from zero.
An example: Linda is 60 and retires in 2026 with $600,000 in her Roth 401(k). Of that, $250,000 is her own contributions and $350,000 is investment growth. She has contributed to the plan for 12 years, and her 401(k) distributions would be fully qualified. She rolls the balance into a brand-new Roth IRA.
Because this is her first Roth IRA, her clock starts January 1, 2026. Her withdrawals won't be fully qualified until 2031. If she needs $300,000 in the meantime for a home purchase or medical costs, the first $250,000 comes out tax-free as a return of her contributions. The remaining $50,000 is earnings and is taxable as ordinary income. Because she's over 59½, she avoids the 10% penalty, but she still owes the tax.
Now suppose Linda had opened a Roth IRA back in 2020 with just $1,000. Her clock would have been satisfied long ago, and the entire $600,000 rollover would be available completely tax-free on day one. A $1,000 decision would have protected $350,000 of growth.
Pro-Rata vs. Contributions-First: Why the Roth IRA Is Usually the Better Home
The five-year trap is one reason to plan ahead. Another is how each account treats withdrawals that aren't qualified.
Roth 401(k) and 403(b) accounts use pro-rata treatment. Every non-qualified withdrawal is treated as a proportional mix of contributions and earnings. Say Mark, age 45, has a $200,000 Roth 401(k) made up of $120,000 in contributions and $80,000 in earnings. He takes a $20,000 non-qualified distribution after leaving his job. Forty percent of it, or $8,000, is taxable earnings. Because he's under 59½, that $8,000 is generally also subject to the 10% early withdrawal penalty.
Roth IRAs use ordering rules. Withdrawals come out in a set order. Your regular contributions come out first, then conversion and rollover amounts, and earnings come out last. If Mark's money were in a Roth IRA with the same $120,000 of contribution basis, his $20,000 withdrawal would be treated as a return of contributions. He would owe no tax and no penalty.
The flexibility of the Roth IRA is valuable. You can only use it wisely if the five-year clock is already ticking when the money arrives.
How to Start Your Roth IRA Clock Now
The fix is simple: open a Roth IRA and fund it, even with a small amount, well before you expect to roll over your workplace Roth.
Make a direct contribution if you're eligible. For 2026, the IRA contribution limit is $7,500, plus a $1,100 catch-up if you're 50 or older. Eligibility phases out at higher incomes: roughly $153,000–$168,000 of MAGI for single filers and $242,000–$252,000 for married couples filing jointly.
Use the prior-year contribution window. You can make a Roth IRA contribution for the previous tax year up until the tax filing deadline. A contribution made in, say, March 2027 and designated for tax year 2026 starts your clock on January 1, 2026. That's more than a year of "free" time on the clock.
If your income is too high, consider a backdoor Roth. You make a nondeductible traditional IRA contribution and convert it to a Roth IRA. The conversion starts your Roth IRA clock. Be careful here, though, because the IRS applies its own pro-rata rule to conversions. If you hold pre-tax money in any traditional, SEP, or SIMPLE IRA, part of your conversion will be taxable. This is a place where coordinating with a tax professional pays for itself.
Moving between employer plans? A direct rollover from one Roth 401(k) to another can carry over the earlier plan's start date. That preserves your clock within the workplace plan system.
SECURE 2.0: More Roth Money Is Coming, Whether You Choose It or Not
This planning issue is about to affect far more people. Under Section 603 of SECURE 2.0, starting in 2026, workers age 50 and older who earned more than $150,000 in FICA wages from their employer in the prior year must make any catch-up contributions to that employer's plan on a Roth basis. The same applies to 401(k), 403(b), and governmental 457(b) plans.
A few details matter here:
- The test uses FICA wages, not MAGI. It looks at your prior-year Social Security wages (W-2 Box 3) from the employer sponsoring the plan, not your total household income. Self-employed individuals without W-2 wages from the plan sponsor aren't subject to the rule.
- 2026 catch-up limits are meaningful. The standard catch-up is $8,000 on top of the $24,500 base deferral limit. Workers aged 60 through 63 can contribute an enhanced catch-up of $11,250.
- If your plan doesn't offer a Roth option, affected high earners may lose the ability to make catch-up contributions entirely.
For many high earners in their 50s and early 60s, 2026 will mark their first ever Roth contribution. That means a brand-new five-year clock inside the plan. It also means a future rollover decision where the Roth IRA clock will matter. If you fall into this group, now is the ideal time to open a Roth IRA so both clocks are running in parallel.
Another SECURE 2.0 Change Worth Knowing
Before 2024, Roth 401(k) accounts were subject to required minimum distributions, while Roth IRAs were not. That was a major reason to roll over. SECURE 2.0 eliminated lifetime RMDs for designated Roth accounts beginning in 2024. Rolling over is no longer necessary to avoid RMDs, but the ordering-rule advantage, broader investment menu, and estate planning flexibility of a Roth IRA remain compelling reasons for many retirees.
The Bottom Line
If you have a meaningful Roth 401(k) or Roth 403(b) balance, particularly one with substantial growth, and you don't yet have a Roth IRA, consider opening one now. A small contribution today can start a clock that protects potentially hundreds of thousands of dollars in tax-free growth later. The cost is minimal. The cost of waiting can be a surprise tax bill in exactly the years you were counting on tax-free income.
Every situation is different. The right approach depends on your income, your other IRA balances, your retirement timeline, and your overall tax picture. If you'd like help reviewing your Roth strategy or planning a rollover, I offer both in-person and Zoom consultations. Contact me to schedule a conversation.
This article is for educational purposes only and does not constitute individualized tax, legal, or investment advice. Tax rules are subject to change; consult a qualified professional regarding your specific situation.