Roth 401K distribution question
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.
Permalink 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 Only amounts withdrawn in excess of your contributions would be subject to a 10% penalty.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 Non-qualified distributions are taxed at your regular income tax rate – the penalty applies if earnings are withdrawn before the Roth has been in place for five years.
Permalink 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.
Permalink Submitted by Alan - IRA critic on Mon, 2014-02-03 15:36