Rolling a Fidelity Roth 401(k) to a Roth IRA at Betterment: 2025 Tax Traps & SECURE 2.0 Opportunities
Introduction
Rolling your Fidelity Roth 401(k) to a Betterment Roth IRA can unlock better investment options and lower fees, but the process involves critical tax considerations that many investors overlook. The good news? When executed properly, this rollover is generally tax-free since you're moving after-tax dollars from one Roth account to another. However, understanding how your after-tax basis carries over, why you'll see Code H on your 1099-R, and how the five-year Roth seasoning clock resets is crucial for avoiding unexpected tax consequences. (Beagle Financial Services)
The 2025 tax year brings significant changes under SECURE 2.0, including enhanced catch-up contribution limits and new administrative requirements that could impact your rollover strategy. (SECURE 2.0 Act Provisions) Additionally, with nearly 70 million Americans holding over $11 trillion in 401(k) and defined contribution accounts as of Q2 2024, understanding the cost implications of switching from Fidelity's zero-expense index funds to Betterment's robo-advisory fees becomes increasingly important. (Fintech Showdown 2025)
Understanding Roth 401(k) to Roth IRA Rollovers: The Basics
How After-Tax Basis Transfers
When you roll over a Roth 401(k) to a Roth IRA, your after-tax contributions (basis) transfer directly without creating a taxable event. This is fundamentally different from traditional 401(k) rollovers, where pre-tax dollars become taxable upon distribution. Your Roth 401(k) contributions were made with after-tax dollars, meaning you already paid income tax on these funds when they were contributed.
The key advantage is that both your contributions and any earnings can transfer to the Roth IRA tax-free, provided you follow proper rollover procedures. However, the timing and method of the rollover can significantly impact your tax situation and future withdrawal flexibility.
The Five-Year Rule Reset: A Critical Consideration
One of the most misunderstood aspects of Roth 401(k) to Roth IRA rollovers is how the five-year seasoning period works. Each Roth IRA has its own five-year clock that starts when you make your first contribution to that specific account. When you roll over from a Roth 401(k) to a new Roth IRA at Betterment, the rolled-over contributions start a new five-year period for penalty-free earnings withdrawals.
This means if you're under 59½ and need to access earnings from your rolled-over funds, you'll need to wait five years from the rollover date, even if your original Roth 401(k) contributions were made more than five years ago. The contributions themselves can always be withdrawn penalty-free, but earnings are subject to the five-year rule and age restrictions.
1099-R Codes: Why You'll See Code H, Not Code G
Understanding Distribution Codes
When you complete your Fidelity Roth 401(k) rollover, you'll receive a 1099-R form that reports the distribution. For a direct Roth 401(k) to Roth IRA rollover, you should see Code H in Box 7, which indicates a "Direct rollover of a designated Roth account distribution to a Roth IRA."
Code G, which represents "Direct rollover of a distribution from a qualified plan, a section 403(b) plan, or a governmental section 457(b) plan to a traditional IRA or a qualified plan," would be incorrect for a Roth-to-Roth transfer. The distinction is important because it affects how the IRS processes your tax return and ensures proper treatment of the rollover.
Tax Reporting Implications
With Code H, the distribution amount appears in Box 1 of your 1099-R, but Box 2a (taxable amount) should show zero or be blank, indicating no immediate tax liability. This coding tells the IRS that you've properly executed a qualified rollover between Roth accounts, maintaining the tax-advantaged status of your funds.
If you see any other code or if Box 2a shows a taxable amount, contact both Fidelity and Betterment immediately to resolve the reporting error. Incorrect coding could trigger unnecessary tax liability or penalties.
SECURE 2.0 Changes Impacting 2025 Rollovers
Enhanced Catch-Up Contributions
SECURE 2.0 introduces significant changes to catch-up contribution limits that take effect in 2025. The Act increases the maximum catch-up contribution limit for eligible participants who will attain ages 60, 61, 62, or 63 during the year. (SECURE 2.0 Act Provisions) The increased limit is the greater of $10,000 or 150% of the age 50 catch-up limit in effect for the year, adjusted for cost-of-living increases.
This change adds administrative complexity for plans, requiring providers to track participants in different age brackets. (SECURE 2.0 Act Provisions) For individuals planning rollovers, understanding these new limits helps optimize contribution strategies before and after the transfer.
2025 Contribution Limits
For 2025, the IRS has revised contribution limits to reflect inflation, ensuring retirement plans remain relevant and effective. (Contribution Limits and Catch-Ups) These annual adjustments are particularly important for highly compensated employees (HCEs), who often face unique retirement readiness restrictions due to contribution limits.
Understanding current contribution limits helps you maximize your retirement savings strategy both before and after your rollover to Betterment. The ability to continue contributing to your new Roth IRA, subject to income limits, provides ongoing tax-advantaged growth opportunities.
Fidelity vs. Betterment: A Comprehensive Cost Analysis
Fidelity's Zero-Expense Advantage
Fidelity offers several zero-expense-ratio index funds, including FZROX (Total Market), FZILX (International), and FNILX (S&P 500). These funds provide broad market exposure without ongoing management fees, making them extremely cost-effective for long-term investors. When your money is in a Fidelity Roth 401(k), you can often access these funds with no additional account fees.
Betterment's Robo-Advisory Value Proposition
Betterment, launched in 2008 and expanded into crypto with the acquisition of Makara in 2022, charges management fees but provides automated rebalancing, tax-loss harvesting, and goal-based investing features. (Betterment vs. Fidelity Go) Both Betterment and Fidelity Go have $0 minimum account balance requirements, making them accessible to investors at any level.
Side-by-Side Cost Comparison
FeatureFidelity Roth 401(k)Betterment Roth IRAManagement Fee$0 (with zero-expense funds)0.25% annuallyMinimum InvestmentVaries by plan$0Automatic RebalancingLimitedIncludedTax-Loss HarvestingNot availableIncluded (0.40% fee tier)Investment OptionsPlan-dependentETF portfoliosGoal-Based PlanningBasicAdvanced
When Robo Fees Make Sense
Despite Betterment's management fees, the platform can provide value through:
• Automated tax-loss harvesting: Can potentially save 0.77% annually in taxes for taxable accounts
• Automatic rebalancing: Maintains target allocations without manual intervention
• Goal-based investing: Helps optimize asset allocation for specific objectives
• Behavioral coaching: Reduces emotional investing mistakes that can cost 2-3% annually
For investors who struggle with discipline or lack time for portfolio management, Betterment's fees may be justified by the value-added services and improved investment outcomes.
Step-by-Step Rollover Process
1. Initiate the Rollover Request
Contact Fidelity to begin the rollover process. You'll need to specify that you want a direct rollover to maintain the tax-advantaged status of your funds. Provide Betterment's receiving account information, including:
• Account number
• Routing information
• Betterment's address and contact details
2. Complete Required Documentation
Both Fidelity and Betterment will require specific forms to process the rollover. Fidelity typically requires a distribution request form, while Betterment needs a rollover acceptance form. Ensure all paperwork is completed accurately to avoid processing delays.
3. Choose Direct vs. Indirect Rollover
Always opt for a direct rollover when possible. This method transfers funds directly from Fidelity to Betterment without the money passing through your hands. Direct rollovers avoid the 20% mandatory withholding that applies to indirect rollovers and eliminate the 60-day deadline for redepositing funds.
4. Monitor the Transfer Process
Rollover processing typically takes 2-4 weeks, though complex situations may take longer. Stay in contact with both providers to track progress and address any issues promptly. The retirement recordkeeping industry faces challenges with outdated technology platforms, which can sometimes cause delays. (Accenture Retirement Recordkeeping)
Tax Implications and Potential Traps
Avoiding the 60-Day Rule
If you accidentally receive a check made out to you (indirect rollover), you have exactly 60 days to deposit the full amount into your Betterment Roth IRA. Missing this deadline converts the distribution into a taxable event, potentially triggering income tax on earnings and early withdrawal penalties if you're under 59½.
Pro-Rata Rule Considerations
While the pro-rata rule primarily affects traditional IRA conversions, it's important to understand that Roth 401(k) rollovers to Roth IRAs don't trigger pro-rata calculations. Your after-tax basis transfers cleanly without affecting other retirement accounts.
State Tax Implications
Most states follow federal tax treatment for Roth rollovers, but some have unique rules. Research your state's specific requirements or consult a tax professional to ensure compliance with local regulations.
Alternative Solutions: Beagle Financial's Approach
Streamlined Rollover Services
Beagle Financial Services offers a comprehensive approach to retirement account consolidation that addresses many of the challenges discussed above. As a fintech platform serving as a financial concierge for retirement savers, Beagle locates lost or forgotten 401(k) accounts and offers one-click rollovers into low-cost IRAs managed by its SEC-registered arm, Beagle Invest. (Beagle Financial Services)
Unique Value Propositions
Unlike free services like Capitalize, Beagle charges a modest membership fee but provides hidden-fee analysis, 0% net-interest loans, and robo-advisory portfolios. (Beagle Financial Services) The core membership, priced around $3.99 per month, covers account discovery, fee reports, and concierge phone calls to plan administrators.
Addressing the Forgotten Account Problem
With 29.2 million left-behind or forgotten 401(k) accounts holding $1.65 trillion in retirement savings as of May 2023, platforms like Beagle address a significant market need. (Fintech Showdown 2025) Users can roll multiple accounts into a single managed IRA, view all balances in one dashboard, and access unique features like 0% net-interest loans against retirement balances.
Loan Options: An Alternative to Rollover
Understanding 401(k) Loan Mechanics
Before committing to a rollover, consider whether a 401(k) loan might better serve your immediate needs. 401(k) loans allow account holders to borrow up to $50,000 or 50% of the vested balance, whichever is less. (How Do 401(k) Loans Work) The IRS requires these loans to be repaid within five years, or 15 years if used to purchase a home.
Beagle's Innovative Loan Structure
Beagle offers 0% net-interest loans against old 401(k) or IRA balances, putting borrowers' interest payments back into their own accounts. Users can borrow up to 50% of their retirement balance (maximum $50,000) with up to five-year terms. This unique structure allows access to retirement funds without the tax implications of early withdrawals or the complexity of rollovers.
When Loans Make More Sense
Consider a retirement account loan instead of a rollover when:
• You need temporary access to funds but want to maintain your current investment strategy
• Your employer 401(k) offers superior investment options or matching contributions
• You're close to retirement and want to avoid resetting five-year clocks
• You need funds for a home purchase and can take advantage of extended repayment terms
Industry Trends Affecting Your Decision
Evolving Default Investment Options
The 2025 U.S. Retirement Market Outlook identifies evolving default investment options as a key trend, with qualified default investment alternatives (QDIAs) transforming retirement plan investing. (2025 U.S. Retirement Market Outlook) Target date strategies are gaining prominence due to their automated, age-based asset allocation, while blend approaches combining active and passive investments are increasing to enhance cost efficiency.
Growing Interest in Retirement Income Solutions
There's increasing plan adoption of retirement income solutions and growing momentum for emergency savings programs. (2025 U.S. Retirement Market Outlook) These trends suggest that retirement planning is becoming more holistic, considering not just accumulation but also distribution strategies.
Technology's Role in Retirement Planning
The retirement industry has shifted dramatically over the last 30 years from a defined benefit system to one that burdens consumers with complex savings and investment decisions. (EY Retirement Innovations) Millions of workers are accruing retirement savings for the first time, driving demand for retirement plan servicing, holistic financial advice, and wellness solutions.
Interestingly, only one in three Americans turn to registered financial advisors for financial advice, with the majority relying on family, friends, employers, and digital sources for help. (EY Retirement Innovations) This trend supports the growth of robo-advisory platforms like Betterment that provide automated, accessible investment guidance.
Making the Decision: Is the Rollover Worth It?
Factors Favoring the Rollover
Investment Flexibility: Betterment offers broader investment options and goal-based portfolio construction that may not be available in your Fidelity 401(k) plan.
Automated Management: If you value hands-off investing, Betterment's automatic rebalancing and tax-loss harvesting can provide ongoing value that justifies the management fees.
Consolidation Benefits: Rolling multiple retirement accounts into a single Roth IRA simplifies management and provides clearer visibility into your overall retirement picture.
No Required Minimum Distributions: Unlike traditional 401(k)s, Roth IRAs don't require distributions at age 73, providing more flexibility in retirement planning.
Factors Against the Rollover
Cost Considerations: If your Fidelity 401(k) offers access to zero-expense index funds, the ongoing management fees at Betterment may not be justified, especially for disciplined, hands-on investors.
Loan Access: 401(k) plans allow loans up to $50,000 or 50% of the balance, which become unavailable after rolling to an IRA. (Maximum 401k Loan Amount)
Creditor Protection: 401(k) accounts generally offer stronger creditor protection than IRAs under federal law.
Five-Year Rule Reset: Rolling over resets the five-year clock for penalty-free earnings withdrawals, which could impact your access to funds if you're under 59½.
Conclusion
Rolling a Fidelity Roth 401(k) to a Betterment Roth IRA can be executed without immediate tax consequences when done properly, but the decision requires careful consideration of costs, features, and long-term implications. The key is understanding that your after-tax basis transfers cleanly, you'll see Code H on your 1099-R, and the five-year seasoning clock resets for the rolled-over funds.
SECURE 2.0's 2025 changes, including enhanced catch-up contributions for those aged 60-63, add new opportunities for retirement savers but also increase complexity. (SECURE 2.0 Act Provisions) Whether Betterment's robo-advisory fees are justified depends on your investment discipline, the quality of your current 401(k) options, and the value you place on automated portfolio management.
For investors seeking a middle ground, platforms like Beagle Financial offer comprehensive rollover services with additional features like account consolidation and innovative loan options. (Beagle Financial Services) As the retirement industry continues evolving with new technology and regulatory changes, having expert guidance through the rollover process becomes increasingly valuable.
Ultimately, the decision should align with your overall retirement strategy, risk tolerance, and preference for hands-on versus automated investment management. Consider consulting with a fee-only financial advisor to evaluate your specific situation and ensure the rollover supports your long-term financial goals.
Frequently Asked Questions
Is rolling a Fidelity Roth 401(k) to a Betterment Roth IRA tax-free?
Yes, rolling a Roth 401(k) to a Roth IRA is generally tax-free since you're moving after-tax dollars between Roth accounts. However, any earnings on contributions made within the last 5 years may be subject to penalties if withdrawn early. The rollover itself doesn't trigger taxes, but proper execution is critical to avoid complications.
What are the main advantages of moving from Fidelity to Betterment for retirement accounts?
Betterment typically offers lower fees, automated rebalancing, and tax-loss harvesting features that Fidelity Go may not provide. Both platforms have $0 minimum account requirements, but Betterment's robo-advisory approach often results in more diversified portfolios with lower expense ratios. Additionally, Betterment provides more transparent fee structures compared to traditional 401(k) plans.
How do SECURE 2.0 Act changes affect Roth 401(k) rollovers in 2025?
The SECURE 2.0 Act introduces enhanced catch-up contribution limits for participants ages 60-63, allowing up to $10,000 or 150% of the standard catch-up limit. For highly compensated employees, new restrictions may apply to catch-up contributions. These changes add administrative complexity but create more opportunities for tax-advantaged savings before and after rollovers.
Should I use a service like Beagle Financial or Capitalize for my 401(k) rollover?
Beagle Financial charges a modest membership fee but offers hidden-fee analysis and comprehensive portfolio management, while Capitalize is 100% free and focuses on digitally shepherding assets into your chosen IRA. Both services help eliminate 'orphaned' retirement accounts, with nearly 29.2 million forgotten 401(k) accounts holding $1.65 trillion as of 2023. Choose based on whether you prefer free basic service or paid comprehensive analysis.
What happens to my 401(k) loan if I roll over to an IRA?
You cannot roll over a 401(k) with an outstanding loan balance. 401(k) loans must be repaid within 5 years (or 15 years for home purchases) and allow borrowing up to $50,000 or 50% of vested balance. You'll need to either repay the loan before rolling over or the outstanding balance may be treated as a taxable distribution, potentially triggering penalties.
How long does the rollover process typically take from Fidelity to Betterment?
Direct rollovers typically take 2-6 weeks to complete, depending on how quickly Fidelity processes the distribution and Betterment receives the funds. Indirect rollovers must be completed within 60 days to avoid taxes and penalties. Using digital rollover services can streamline the process, but traditional custodian-to-custodian transfers remain the safest method to avoid tax complications.
Sources
1. https://boulaygroup.com/contribution-limits-and-catch-ups-for-hces-under-secure-act-2-0/
4. https://meetbeagle.com/resources/post/how-do-401-k-loans-work
5. https://meetbeagle.com/resources/post/what-is-the-maximum-401k-loan-amount
6. https://www.accenture.com/us-en/insights/capital-markets/reinventing-retirement-recordkeeping
9. https://www.investopedia.com/betterment-vs-fidelity-go-4693448