What are the Roth 401(k) withdrawal rules?
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 percent or larger share of the employing company, distribution must begin at age 70 1/2 regardless of employment status.
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 total account earnings to 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 percent of the account balance up to $50,000. Loans must be repaid within five years in generally equal payments made at least quarterly. 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.
In addition to the previous answers, note that a direct rollover to a personal Roth IRA would allow you to remove the contributions from the account without penalty or taxes. This is an important question, because withdrawal rules for Roth 401(k) accounts are not the same as individual Roth IRA accounts. Therefore, make sure to consult your tax professional before making indirect or direct rollovers and withdrawals.
The rules are similar to withdrawals from a Roth IRA but there is a slight difference.
- You must have been contributing to the Roth 401(k) for at least 5 years
- You must be 59 ½ or permanently disabled
- Distributions must begin by age 70 ½ or when account holder retirees whichever occurs last (remember it can be rolled into a Roth IRA)
- Distributions of earnings prior to 59 ½ (excluding some special circumstances) will be subject to a 10% penalty.
Assuming that you are no longer working with the company, the rules are relatively stratight forward (if you are still working, you will have to look at your plan's Summary Plan Description/SPD to determine the ways you can access your 401k - loan, hardship withdrawal or in-service distribution, etc.).
Your account statements should indicate whether you have the 5 years completed but if not you can find out from the plan administrator. The first year the Roth 401k was available was 2006, and if your first contribution was prior to 2009, your Roth 401k is fully qualified right now and tax free upon distribution. But you need to determine if you are eligible to distribute this account while still in service. And if you are, I would roll it over to a Roth IRA if you want to trade. There is no benefit to distribute it into a taxable account even if the distribution was tax free. If your trades generate gains in the taxable account, you will owe annual taxes on the gains, but if you trade in a Roth IRA, all gains are tax deferred until you have had a Roth IRA for 5 years and tax free after that, and you do not report any of them on Sch D. There are no RMDs on a Roth IRA, and even if you do not have a Roth IRA right now, the rollover of a qualified Roth 401k will be treated as regular Roth IRA contributions and tax free if you ever withdraw them.
Hope that helps.
1. Principal contributions: You can withdrawal your contributions anytime, tax and penalty free
2. Non Principal Withdrawals
- If your ROTH IRA is less than 5 years old and you are under 59 1/2
Earnings (not principal) may be subject to taxes and penalties. However, you may be able to avoid penalties (but not taxes) if you satisfy one of the following conditions:
- First-time, first home purchase (up to $10,000 lifetime maximum)
- Qualified education expenses
- Unreimbursed medical expenses or health insurance if you’re unemployed.
- 72(t) or substantially equal periodic payments.
- If you’ve met the five-year holding requirement and at least 59 1/2, you can withdraw money from a Roth IRA with no taxes or penalties.
There is no Required Minimum Distribution at Age 70½ and over.
A seemingly innocuous question can sometimes be difficult to answer. Any retirement account withdrawal depends on various factors to make it a qualified withdrawal. Why? 10% tax penalty. No one likes to pay tax, even less for an additional 10% tax penalty. Therefore, you need to take every precaution to protect yourself for a retirement withdrawal.
Assume we’re talking about the qualified withdrawal while you’re alive. The rules are either you hold the Roth 401(k) for five years and you’re 59½, or you need the money because you’re disabled. Both cases legitimize your distribution as a qualified withdrawal means the money will not be added into your gross income.
If you’re thinking about the qualified beneficiary withdrawal, all he/she needs to prove it’s your death certificate. Even with that, there can be some wrinkles. If the spouse is the beneficiary and decides to roll over the distribution to his/her IRA or employer’s Roth 401(k) account, the spouse’s age & disability will be used to determine his/her future distribution to be qualified or non-qualified.
As you can see, there is so much to consider. It’s like a mine field for any retirement withdrawals. Be prepared to talk to a professional before the proceeding. Best!