It is one of the test for a qualified distribution, if you don’t meet this, then you will have to pay tax on the earnings portions of any distribution that is not rolled over. A qualified distribution would be tax free after five years. The clocks start on your five-year time the first day of the first year for which you make a Roth 401(k) contribution. For example, if you started to make contributions at any time in 2005, your clocks starts on January 1, 2005 and the five year period will end in 2009. In this case, qualified distributions can be taken, beginning January 1, 2010 if you are over 59 ½ or disabled.

In Roth IRAs, you have just one 5-year period clock for all your accounts. However that isn’t true for Roth 401(k) accounts, if you initiate an account with one employer in 2005 and another account with other employer in 2007, then you have to deal with two different 5-year periods. Qualified distributions can be taken from the first account commencing in 2010, but for another account you will have to wait until 2012 to take qualified distributions.

There is one exemption, if you roll to the second account from the first account, then the complete account is treated as if it is set up in the initial year of either of the two accounts. The time period of your Roth 401(k) account is not transferred to a Roth IRA when you do a rollover. For example, you have a Roth 401(k) for just a few years, but you have a Roth IRA more than five years, then you can satisfy the 5-year test for all your money by rolling the Roth 401(k) to a Roth IRA.