Roth 401k Distribution
Hello. A 401k I manage is terminating. One participant is under 59 1/2 and has been contributing to the Roth 401k option. When the plan dissolves, if she distributes (as a lump sum cash dist.) some or all of her Roth 401k deferral assets, will she be penalized or taxed?
Permalink Submitted by Alan - IRA critic on Thu, 2015-10-22 17:56
If she takes distributions instead of rolling the Roth 401k to a Roth IRA, her distributions are pro rated between her contributions and the plan earnings. The portion allocated to earnings will be taxable and reported in Box 2a of the 1099R. And this same amount will also be subject to the 10% penalty unless participant qualifies for an exception. One such exception that might apply is the age 55 separation exception. However, if the Roth 401k balance is rolled over to a Roth IRA, and then Roth IRA distributions are taken, the earnings will come out last, and she can get her contributions back without tax or penalty.