What are the Roth 401(k) withdrawal rules?

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June 2018

To make a "qualified" withdrawal from a Roth 401(k) account, the account holder must have been contributing to the account for at least the previous five years and be either 59 1/2 years old, deceased, or completely and permanently disabled. Because contributions to a Roth plan are made with after-tax dollars, you do not need to pay income tax on qualified distributions, though you would still report them to the IRS on Form 1099-R when filing your taxes.

In addition, the terms of Roth 401(k) accounts stipulate that distributions must begin by age 70 1/2 or when the account holder retires, whichever comes later. If the account holder owns a 5% or larger share of the employing company, distribution must begin at age 70 1/2 regardless of employment status.

Unqualified Withdrawals

Many people either decide to retire before they reach 59 1/2 or simply end up needing retirement funds for other purposes earlier in life. If a withdrawal is made from a Roth 401(k) account that does not meet the above criteria, it is considered "unqualified" and incurs income taxes. However, taxes are only assessed on the earnings portion of the withdrawal. Since Roth contributions are made with after-tax dollars, you do not need to pay taxes on that portion again.

To calculate the portion of the withdrawal attributable to earnings, simply multiply the withdrawal amount by the ratio of the total account earnings to the account balance. If your account balance is $10,000, comprised of $9,000 in contributions and $1,000 in earnings, then your earnings ratio is $1,000 / $10,000, or 0.10. Therefore, a $4,000 withdrawal would include $400 in taxable earnings, which would need to be included in the gross annual income reported to the IRS on your taxes.


You can also avoid taxation on your earnings if your withdrawal is for the purposes of a rollover. If the funds are simply being moved into another retirement plan or into a spouse's plan via direct rollover, no additional taxes are incurred. If the rollover is not direct, meaning the funds are distributed to the account holder rather than from one institution to another, the funds must be deposited in another Roth 401(k) or IRA account within 60 days to avoid taxation.

In addition, an indirect rollover means that the portion of the distribution attributable to contributions cannot be transferred to another Roth 401(k) but can be transferred into a Roth IRA. The earnings portion of the distribution can be deposited into either type of account.


Though there really is not a no-strings-attached way to withdraw tax-free money from your Roth 401(k) before age 59 1/2, taking a loan from your account can be a quick way to use the funds for current needs without diminishing your retirement savings. Many 401(k) plans, Roth or traditional, allow for the account holder to take a loan of up to 50% of the account balance up to $50,000. Loans must be repaid within five years in generally equal payments made at least quarterly. Investopedia has compiled a list of the best brokers for IRAs and the best brokers for Roth IRAs to help you find the right broker for these kinds of requests.

The benefit is that you are borrowing money from yourself, and all payments and interest charged go directly back into your retirement account. Failure to repay the loan as stipulated, however, may result in it being considered a taxable distribution.

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