post age 55 distribution from Roth 401k

Submitted by David Mitchell on Wed, 2015-05-06 00:26

I have a client who is 58 and is about to have a separation from service from her employer. She has participated in her employer’s Roth 401k for 2 years, and has a Roth IRA on her own, funded solely by an IRA conversion +/-10 years ago. She has no TIRA. The employer plan also has a small match.
Assuming she has some Roth 401k basis, and some Roth 401k growth, and some employer match in this plan, and wants to take out the plan balance before age 59.5 (but had a separation from service after age 55), how will these different money types be taxed? Does she need to Roll over the Roth 401k balance into her Roth IRA before taking a distribution in order to get her Roth 401k basis tax-free? Is there a way to separate the Roth 401k basis from the Roth 401k growth to take a distribution of only the basis from her 401k? (What is the appropriate strategy to get access to her Roth 401k basis tax-free?)
Thank you



Submitted by Alan - IRA critic on Wed, 2015-05-06 00:48

Since Roth 401k amounts must be distributed with a pro rated amount of earnings and basis, in order to avoid taxes the Roth 401k would have to be rolled to a Roth IRA and the ordering rules would result in earnings coming out last. That said, the existing Roth IRA balance itself is tax free up the earnings balance. But without the wage income, client will probably be in a very low bracket and could just take some pre tax 401k distributions until taxable income perhaps reached the 15% bracket, then take Roth IRA distributions for the rest. It will be easy to avoid the 10% penalty and this only needs to be done for a year, but the taxable vs non taxable amounts depends on the tax rate client would pay vrs the expected rate in retirement. Client has 3 sources to mix and match, the pre tax 401k funds (taxable but penalty free), the Roth 401k amounts (mostly tax free and penalty free) or the Roth IRA (tax and penalty free up to the amount of earnings).



Submitted by David Mitchell on Wed, 2015-05-06 18:30

Is there still a 10% penalty on the Roth 401k earnings portion, or is that 10% penalty-free because of employee separating from service after age 55? (understandably taxable due to not being 59.5). Does 401k company send report of basis in Roth 401k to Roth IRA custodian if directly rolled over?Her Roth IRA was funded solely by a conversion so it is my understanding her conversion basis, although more than 5 years old, is still subject to 10% penalty even though it is non-taxable, until age 59.5, correct?Thank you



Submitted by Alan - IRA critic on Wed, 2015-05-06 19:53

  • There are no 10% penalties on any portion of the 401k once qualifying for the age 55 separation exception. Roth 401k basis is shown in a separate box on the 1099R, and this basis is then treated as a regular Roth IRA contribution (or as a Roth conversion if an in plan Roth rollover was done) once the funds are in the Roth IRA.
  • After 5 years has passed for a Roth conversion, the 10% penalty no longer applies. The penalty also ceases as of age 59.5, so whichever occurs first between the 5 years or 59.5 will eliminate the penalty for any prior conversions.


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