Catherine M. Censullo, CPA

One Minute Tax Tip

What are the Disadvantages of Owning
a Roth 401(k) Account?

Have you ever considered the pros and cons of owning a Roth IRA vs. a Roth 401(k)?  Three weeks ago, I spoke about the pros of owning a Roth IRA account.  Two weeks ago, I spoke about the cons of owning a Roth IRA account.  Last week, I spoke about the pros of owning a Roth 401(k) account.

Today I will help you consider some of the cons of investing in a Roth 401(k) account. 

The major disadvantages and limitations of owning a Roth 401(k) account are as follows:

  • You cannot roll your Roth IRA funds into your Roth 401(k) account
  • Your Roth 401(k) from each employer has its own 5-year holding period requirement
  • Your Roth 401(k) funds will pick up the 5-year holding period of the Roth IRA
    • This is bad when the Roth 401(k) has been held for five years or more and the Roth IRA has not
  • Your Roth 401(k) accounts have required minimum distributions beginning at age 70 1/2
  • You cannot recharacterize any of your Roth 401(k) contributions or conversions
  • Your salary deferrals are made on an after-tax basis and will not reduce your taxable income
  • Any in-plan conversions you decide to make are subject to income tax
  • Your investment options are limited to the choices offered by your employer
  • Your Roth IRA non-qualified distributions are subject to the pro-rata rule, not the Roth IRA ordering rules
  • The availability of your funds will be subject to the plan's rules
As you can see, all these rules can be very complicated and confusing.  If you need help evaluating any of the above considerations or related retirement plan decisions, please call the office at 914.997.7724 and set up an appointment to discuss your personal situation.


Catherine M. Censullo, CPA

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