Roth 401(k) Withdrawal
The start-up company that Allen works for is closing its doors. He needs to do something with his Roth 401(k), and that may involve w/drawing the funds for living expenses, depending on Allen’s length of unemployment.
-The Roth 401(k) value is $6700.
-The 401(k) was just opened this year, and all activity has taken place in 2022.
-Allen has contributed a total of $5K.
-The company’s contribution has been $3K.
-Allen is 58 years old.
Assume Allen takes a distribution of the entire account balance. How will the company contribution be taxed? I assume Allen will have to pay tax on the company contributions, but it shouldn’t be treated as investment earnings. The fair taxation would be to treat the company contribution as ordinary income but not to impose a 10% penalty since there are no earnings. Is the IRS fair?
Permalink Submitted by Alan - IRA critic on Mon, 2022-11-21 18:22
Company matching contributions are made to the pre tax 401k account, even when matching Roth contributions. Therefore, the Roth sub account is likely worth 3,700 and has sustained investment losses of $1,300. With no gains in the Roth 401k, the entire 3700 can be distributed tax and penalty free. However, the match of 3,000 would be in a pre tax account but may not be vested. A distribution from the pre tax 401k account will be taxable, but not subject to penalty because he qualifies for the age 55 separation exception to the penalty. Perhaps his best option is to do a direct rollover of the pre tax account (if vested) to a TIRA, and request a distribution of the 3700 Roth balance, which would be tax and penalty free. He should verify these assumptions with his account statement or the plan administrator.