Distributions following Rollover from Roth 401k to Roth IRA
Assume a 31 year old employee makes a $5,000 annual contribution into her Roth 401k for 4 consecutive years, for a total Roth 401K contributions of $20,000. During the 4 years, the employer makes matching contribuitons of $2000. The employee then quits her job the following year, at age 35, when the Roth 401K is now worth $30,000 (includes $8,000 of growth). Upon leaving the company, she rolls the entire $30,000 Roth 401K balance into her Roth IRA. 1. Can the 35 year old former employee now withdraw $25,000 (her original contributions to the Roth 401k plan while working) from her Roth IRA without paying any income taxes or penalty taxes? 2. If yes, could she have rolled the $20,000 into her Roth IRA while still working? 3. When can she withdraw the employer contributions and growth on the account without paying income tax or a penalty?
Permalink Submitted by Alan Spross on Tue, 2011-09-20 01:25
First, note that the employer contribution CANNOT go into the Roth account. The 2,000 had to go to the pre tax account.
So now let’s assume that the Roth 401k is worth 30,000 and has 10,000 in earnings when rolled to the Roth IRA. If this 30,000 is her only Roth IRA balance, ie this rollover was her first Roth IRA contribution of any type, then she could withdraw 20,000 tax free from the Roth IRA (not 25,000 since her contributions were only 20,000). If she took out more than 20,000 the excess amount would be taxable and subject to 10% penalty since her Roth IRA is not yet qualified.
Q2 – If her plan allowed in service distributions (highly unlikely for Roth 401k contributions prior to 59.5), the amount distributed is pro rated between contributions and gains. If that entire amount is then rolled to the Roth IRA, the contribution amount is deemed to be regular Roth IRA contributions and the earnings amount is considered Roth IRA earnings.
Q3 – Again, employer contributions went to the pre tax account (standard 401k). But for the Roth 401k, for the entire account including earnings to be tax free, the holding period must be at least 5 years AND she must be 59.5 (same as for Roth IRA).