Roth 401K distribution question

Submitted by Kaori Finn on Sun, 2014-02-02 16:35

My husband works for a university and contributes to a 403b retirement plan there. I have developed a small sole proprietorship from home and set up a Solo 401K with employer, employee tax deferred, and Roth accounts. We are upper middle income with children in college, married filing jointly. So, this system will allow us to contribute to the various retirement accounts to such an extent that it can really strain our family budget if we’re aggressive.

My question is what are the penalties for non-qualified withdrawals from my Solo 401K Roth account if we need the money for some reason? I understand that earnings need to come out pro-rata. So, a Roth 401K is less advantageous in this respect than a Roth IRA. Online I’ve read various references to penalties for early distributions from Roth 401Ks. I couldn’t tell if there was any penalty other than needing to bring earnings out of the account in a pro-rata fashion. I read IRS Publication 560, but didn’t think it was clear about whether I’d have to pay a 10% penalty for a non-qualified withdrawals. References to Roth distributions only referred to qualified withdrawals.

Other info: We’re both 55. I only established the Roth in 2013. So, this issue will be important to us for a few more years. This is my first post to this forum. Thank you in advance for any help.



Submitted by mk foss on Sun, 2014-02-02 23:49

You should see if the Roth portion of the 401K can be rolled to a Roth IRA while you’re still working. That would be an “in service” distribution. You can remove your contributions to a Roth IRA without tax or penalty. Only amounts withdrawn in excess of your contributions would be subject to a 10% penalty. There is no pro-rata rule with a Roth IRA. Non-qualified distributions are taxed at your regular income tax rate – the penalty applies if earnings are withdrawn before the Roth has been in place for five years.



Submitted by Kaori Finn on Mon, 2014-02-03 04:17

OK. Thank you very much.  I will examine the rules regarding in-service rollovers.  I have several IRAs with long histories and reasonably large balances.  So, I haven’t seriously considered rollovers from those into Roth IRAs and thus didn’t think about this.  However, an in-service rollover would be different.  Thanks for the suggestion.In your response, you mentioned something I have heard several times: a “penalty.”  Is the only penalty for a premature distribution from the Roth 401K the tax on the pro-rata earnings at my regular rate?  Is there any actual penalty, i.e., 10% additional tax on the withdrawals?Thanks so much for your help.



Submitted by Alan - IRA critic on Mon, 2014-02-03 15:36

  • You probably would not want to do rollovers from your pre tax IRAs to a Roth IRA will still working since that would produce a large tax bill unless those rollovers were in small amounts. However, a rollover of your Roth 401k balance to a Roth IRA would be tax free, as this is not a conversion.
  • With respect to your solo K, you would have to determine if and when the plan will allow an inservice distribution, or if the plan allows a 401k loan or hardship distribution. Otherwise, you probably cannot take distributions at all until at least age 59.5. Before that, if the plan document does not allow loans, you can check into having it amended to allow them.
  • Once distributions are allowed, from the Roth portion your earnings will be pro rated with your contributions and the earnings would be taxable and subject to 10% penalty until age 59.5. This tax and penalty is only on the earnings portion of the distribution. But if a distribution was allowed, you could first roll the Roth 401k to a Roth IRA tax free and take distributions from the Roth IRA where earnings would come out last, so you could avoid tax and penalties fairly easily.


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