401k containing both Pre-tax and Roth
I started contributing to a Roth 401k two years ago.(when first available) after 24 years of pre-tax contributions. I plan to retire at 55 and make penalty free withdraws from my pre-tax 401K. However I just found out that the money is mixed within the accounts and the only way to separate them is to roll all of the pre and post tax money into IRA’s but IRA’s don’t offer the penalty free withdraw at 55 like the 401k offers. I don’t want to take money out of the Roth portion because it would still be penalized because it is less than 5 years old. Is there any way to withdraw just the pre-tax money from a mixed 401k?
Permalink Submitted by Alan - IRA critic on Wed, 2016-03-02 17:44
That is subject to plan provisions, not IRS provisions. Roth 401k money and pre tax money cannot be commingled. However, some plans like the TSP require distributions to be pro rated between the Roth and non Roth balances. If your plan has that restriction, you might consider it as the predominant portion of your plan is in the pre tax account. The Roth portion of your distribution would have to contain pro rated Roth earnings, but the age 55 separation exception would waive any 10% penalties. Conversely, if you rolled over the entire plan to IRA accounts, you would have to start a 72t plan in order to receive penalty free distributions, and these plans are very rigid.
Permalink Submitted by David Mertz on Wed, 2016-03-02 19:25
Even though the 401(k) plan may require proportional distributions from the traditional and Roth accounts within the plan, the distributions from these two accounts are reported separately. Nothing prevents you from indirectly rolling the Roth portion of the distribution over to a Roth IRA while you keep the traditional portion. This would mean taking a distribution large enough so that the portion from the traditional 401(k) account satisfies your needs. I believe that 20% taxes will be withheld from the taxable portion of the Roth 401(k) distribution, so you’ll need to make up for this by substituting other funds to complete the rollover of the entire Roth portion. You’ll then get any excess withholding back when you file your tax return. Rolling over the Roth portion will allow the earnings to eventually be distributable tax free from the Roth IRA.
Permalink Submitted by Alan - IRA critic on Wed, 2016-03-02 20:08
One of the problems with large or lump sum distributions that are not rolled over is spiking your tax bracket. If you wanted enough from the pre tax portion to finance 4 or 5 years of living expenses, the additional up front taxes would probably more than offset any advantage from the age 55 penalty waiver. Therefore, you would have to determine if your plan allows pro rated annual distributions in order to keep the taxable amount limited to one year’s worth of distributions. While the plan can either require pro rated distributions and also limit the number of distributions, they cannot deny you a direct rollover of the portion they allow to be distributed. If they allow the annual pro rated distributions, you could do a direct rollover of the designated Roth portion and receive the pre tax portion personally subject to 20% mandatory withholding. You need to find out exactly what partial distribution options the plan provides, whether pro rated between the sub accounts or not. Then you can develop the most tax efficient plan for the 4-5 year period.