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A system designed to assist small 401(ok) balances comply with employees to their subsequent job is working right into a snag: Roth accounts.
The Portability Companies Community, a coalition of huge 401(ok) directors — together with Constancy Investments, Vanguard Group and Alight Options, amongst others — along with Retirement Clearing Home, has been in operation since late 2023. Its function is to deal with the issue of small-balance 401(ok)s being left behind when staff depart their firm — which may end up in employees dropping monitor of their retirement financial savings or cashing out.
Usually, whenever you half methods with an employer, you’ll be able to depart your cash of their 401(ok) plan if the account worth is above $7,000. Balances below $1,000 that you simply depart behind normally outcome within the plan cashing you out and mailing you a test, which can be taxable and topic to a ten% penalty when you’re below age 59½.
For quantities between $1,000 and $7,000, most plans roll over the stability to an particular person retirement account if the ex-employee takes no motion to maneuver it on their very own. If the cash is in a standard 401(ok) — funded with pre-tax contributions and taxed when withdrawn in retirement — it goes into a standard IRA. Likewise, Roth 401(ok)s, funded with after-tax contributions and withdrawn tax-free down the highway, go into Roth IRAs.
And that is the place Roth cash is getting caught within the auto portability system. Whereas the community goals to attach these rolled over, small-balance IRAs with their homeowners as soon as the employees are enrolled in a 401(ok) at new employers, solely conventional IRAs could be rolled right into a 401(ok). Roth IRAs can’t, on account of federal regulation.
“It is sadly simply the best way the tax regulation works,” stated Kelsey Mayo, chief of retirement coverage and regulatory affairs for the American Retirement Affiliation, a commerce group that represents the retirement plan trade. “It could actually’t legally work for Roth cash. If the Roth cash rolls out [of the 401(k)], it will get caught within the IRA.”
There have been about 1.7 million of those rollovers in 2025
As employees change employers all through their careers, it is doable for 401(ok) accounts to get left behind, deliberately or by chance. The standard U.S. employee holds about 13 jobs between ages 18 and 58, in line with an ongoing Bureau of Labor Statistics survey of individuals born between 1957 and 1964.
An estimated 31.9 million 401(ok) accounts, totaling about $2.1 trillion, stay with former employers, in line with 2025 analysis from Capitalize, which helps individuals roll over office financial savings to IRAs. The information consists of accounts that former staff deliberately depart of their outdated plan, for instance, to benefit from decrease charges or stronger creditor protections relative to IRAs.
When employers roll over small balances to IRAs, the cash typically sits in money. This additionally signifies that whereas in that rollover IRA, the cash will not be benefiting from funding good points, which hurts long-term financial savings. An estimated 1.7 million of those rollovers occurred in 2025, up from an estimated 1.6 million in 2024, in line with the Worker Profit Analysis Institute.
31,000-plus IRAs have landed in homeowners’ new 401(ok)
The Portability Companies Community was created after Congress approved auto-portability for small-balance 401(ok) accounts within the 2022 Safe 2.0 retirement laws.
In easy phrases, the community makes use of know-how from Retirement Clearinghouse that periodically checks with 401(ok) recordkeepers to see whether or not IRA homeowners throughout the community at the moment are in a retirement plan at one other employer within the recordkeeper’s system. If there is a match, the funds could be transferred from the IRA to the brand new plan — once more, so long as it isn’t Roth cash.
To this point, 31,216 IRAs have been matched with employees and rolled into their new 401(ok) plan, in line with Neal Ringquist, chief income officer of the Portability Companies Community and Retirement Clearinghouse.
Not all 401(ok) plans take part within the community. Roughly 21,400 plans are enrolled presently, representing 6.5 million contributors, in line with Ringquist. Nonetheless, 401(ok) recordkeepers are nonetheless within the strategy of signing up, and as soon as the six that already are signed up have totally applied auto-portability, it can characterize about 63% of the market, he stated.
Consolidating retirement financial savings is ‘readability’ for savers
After all, the rule stopping rollovers from Roth IRAs to 401(ok)s applies to any stability, not simply small accounts.
Nonetheless, if an individual has a Roth 401(ok) stability above $7,000, they’ll depart the cash within the plan and roll it straight into their new 401(ok), assuming their new employer permits it. It is solely when the cash takes a cease in a Roth IRA that there’s a difficulty.
Permitting the small-balance Roth IRAs to roll into Roth 401(ok)s can be useful for retirement savers, Mayo stated.
“It is readability for the person saver,” Mayo stated. “If they’ve pretax and Roth cash and solely a part of it follows them to their new employer as a result of the Roth cash will get caught in an IRA, that creates a number of confusion for the saver.”
Invoice would let $7,000 in Roth IRA cash in 401(ok)s
The bipartisan Retirement Rollover Flexibility Act, launched in each the Home and Senate in early December, would change the tax code to permit as much as $7,000 in Roth IRA cash to be rolled over to 401(ok)s. Each payments have been referred to committees of their respective chambers; it is unsure whether or not they’ll languish or transfer ahead within the lawmaking course of.
“We hope this restriction is addressed by laws or regulators quickly, as it will open up further accounts that may benefit from [auto-portability], notably these in state-based [auto-IRA] applications,” Ringquist stated.
These state-run applications typically require employers of a sure measurement to both supply their very own retirement plan or facilitate their employees’ enrollment in, usually, a Roth IRA. If a saver in certainly one of these applications will get a job that provides a 401(ok), they can not roll their Roth cash into their new plan.
“State auto-IRA applications have already enrolled greater than 1.1 million employees, lots of whom by no means earlier than had entry to a office retirement plan, and almost all of them are saving in Roth IRAs,” stated Angela Antonelli, government director of the Heart for Retirement Initiatives at Georgetown College.
“The issue is that when certainly one of these employees strikes to a job with a 401(ok), we make it tough for his or her Roth IRA financial savings to comply with them,” Antonelli stated.