Roth IRA & Roth 401k distribution rules
Hi,
How are a Roth IRA and Roth 401k different in early withdrawal before 59 1/2?
For instance I understand that One can withdraw their contribution amount at anytime and the gain will be subject to capital gains tax in the first five year.
How about Roth 401k?
Also, any other differences?
Thank you much!
Permalink Submitted by Alan - IRA critic on Thu, 2019-05-02 20:12
There are no cap gains in retirement accounts, only ordinary income. The key difference between a Roth IRA and Roth 401k non qualified distributions is that for the Roth IRA, the earnings come out last, so there are no taxes until all the contributions have been withdrawn. Conversely, non qualified distributions from a Roth 401k pro rate earnings with the contributions. So if your Roth 401k contains 10% in earnings, any distribution will have a 10% taxable portion. This can be eliminated by rolling the Roth 401k into a Roth IRA when eligible to do so. This example ignores conversions which add another variable, a 5 year holding period for a conversion to be withdrawn without a 10% penalty on the taxable portion.