Roth 401k In-Service Withdrawals Taxation

Submitted by Dan Simonds on Sat, 2016-09-10 22:28

Can a Roth 401k participant take an in-service withdrawal and if so, is it correct that there would there be no taxes and penalties assuming only after-tax basis is withdrawn?



Submitted by William Tuttle on Sun, 2016-09-11 00:05

It does not matter if it is a traditional or Roth 401k. You can not remove deferrals before 59 1/2, with the exception of hardship withdrawals or loans. A Roth 401k is not like a Roth IRA where you can remove contributions at any time and tax free.

Submitted by David Mertz on Sun, 2016-09-11 13:00

Even if you are permitted to take a distribution from the Roth 401(k), a nonqualified distribution from a Roth 401(k) is prorated between the after-tax (basis) and before-tax (earnings) amounts in the same proportions as exist in the Roth 401(k).  A distribution from a Roth 401(k) does not follow Roth IRA ordering rules.  A distribution from a Roth 401(k) would only be all after-tax if the contribution basis exceeded the value of the Roth 401(k) (meaning that the account contained no earnings).

Submitted by Dan Simonds on Fri, 2016-09-16 19:51

If a Roth 401k is rolled to a Roth IRA, how are distributions handled when it comes to the ordering rules?  The Roth 401k money to be rolled to a Roth IRA consists of both gains and Roth 401k contributions.  If Roth 401k contributions rolled to a Roth IRA are able to be withdrawn first just like Roth IRA contributions, who tracks the order and the details to know the money type of a distribution?  Does the Roth owner need to keep good records or might the 401k custodian and Roth IRA custodian share contribution information? Thank you very much!

Submitted by Alan - IRA critic on Fri, 2016-09-16 20:34

  • The Roth IRA owner always needs to keep records of the composition of the account, but when a Roth 401k is rolled into the Roth IRA the record keeping must reflect the nature of the Roth 401k money. Roth IRA ordering rules apply for all distributions once the funds are transferred to the Roth IRA.
  • If the Roth 401k is qualified at the time of the rollover, the entire amount of the Roth 401k transfer is treated as regular Roth IRA contributions, adding to the prior balance of Roth IRA regular contributions. If the Roth 401k is not qualified but rolled to a Roth IRA that IS qualified, the total account is then qualified. If neither the Roth 401k or the Roth IRA is qualified, the amount of contributions made to the Roth 401k is added to the amount of regular Roth IRA contributions.
  • Other than the Roth 401k account statement or 1099R, you will not get any other help from either custodian in your record keeping other than account statements and history if you do not change Roth custodians often.
  • If you did any in plan Roth rollovers or Roth IRA conversions, you also have to incorporate them into your record keeping. Each one has it’s own 5 year holding period to avoid a 10% penalty, so you have to keep track of the amount of these rollovers and the year.
  • The record keeping is not that hard once you are current. Then you simply update your cumulative records each year.

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