Want to roll a Roth IRA over to a Roth 401(k)? You can't, yet

Workers who have money in a Roth IRA and want to roll the funds into a Roth 401(k) currently have no way of doing so – but a bill introduced Wednesday in the House would change that.

That's necessary, proponents say, as Roth 401(k)s become more widespread as options in employer-sponsored retirement plans and as automatic IRA programs funnel more money into Roth IRAs.

“Our bipartisan bill will allow for the consolidation of assets, reduce the potential for duplicative fees, and bolster retirement savings for families across the country,” Rep. Darin LaHood, R-Ill., and one of the bill's co-sponsors, said in an announcement. “As workers face rising costs and burdensome interest rates, Congress should continue to find solutions to help workers build for a comfortable retirement.”

The measure's other co-sponsor, Rep. Linda Sánchez, D-Calif., noted in the announcement that “nearly 7 million Americans use Roth IRA accounts to save for retirement. As that number continues to grow rapidly across the country, we must ensure workers can roll their savings into designated Roth accounts within a workplace-based retirement plan.”

The use of both Roth IRAs and Roth 401(k)s has been increasing. Interest in the former has only been fueled by the rise of state-sponsored auto-IRA programs, which use Roth IRAs as their account type. Generally, the programs have been designed to get workers started on retirement investing, with the idea that many will later graduate to a 401(k) or other employer-sponsored plan. As of October, there were six auto-IRA programs up and running, representing a total of $990 million in assets, according to data from the Georgetown Center for Retirement Initiatives.

Jim O’Shaughnessy, managing partner at Hub Retirement and Wealth Management, said most people likely think they can roll money from a Roth IRA to a Roth 401(k).

“I don’t see a lot of downside” to the House bill, he said. “Roth in-plan was a newer concept 10-plus years ago, and a majority of plan have it today.”

Enabling rollovers could benefit people who temporarily park money in Roth IRAs after leaving companies at which they had Roth 401(k)s, allowing them to move the money back into a Roth 401(k), O’Shaughnessy noted. “Most people would like to have that flexibility as an option.”

Most large employers now include Roth 401(k) plans alongside their traditional pretax 401(k)s, although only a minority of workers opt for the post-tax accounts.

Data published earlier this year by Vanguard show that 80% of the companies in its book of business offer Roth 401(k)s, up from 71% that did in 2018. Among employers with 5,000 or more employees, 94% offer Roth accounts. However, just 17% of people use the Roth accounts at work when those are available, Vanguard found.

That could increase, at least slightly, if more workers who get started with auto-IRAs later work for bigger companies that offer Roth 401(k)s – if the House bill eventually passes.

The legislation is endorsed by the American Retirement Association, whose CEO Brian Graff noted in the announcement that such rollovers would help people avoid “duplicative fees” associated with having multiple accounts and would also reduce “retirement savings leakage” through automatic portability of accounts.

“These changes will be even more important as state auto-IRA programs grow,” Graff said.

The legislation is the latest example of “trying to reduce friction” in the workplace retirement savings area, although the primary driver is almost certainly the growth of state auto-IRA programs, said Jason Roberts, CEO of the Pension Resource Institute.

“Being able to sweep all those auto-IRA default balances into plans that would allow them to stay Roth is probably where the more immediate need is coming from,” Roberts said.

It could also help reduce the preponderance of multiple, small-balance accounts that people have after working for different employers, he noted.