Roth 401k Distribution

Submitted by MIKE KRUCHTEN on Thu, 2016-09-22 13:38

Is it safe to assume(under current regulations) a distribution(not rollover) from a Roth 401k would be coded as a NQ distribution if the 401k owner is not 59.5 but the 5 year period has been met but participant retires at age 57 or 58 and takes the distribution and not wait until 59.5 distribution would be coded as NQ. Would 1099R be coded as 2 in Box 7 to reflect age 55 penalty exception. I assume Roth 401k doesn’t quite follow this exception?

If not, do we see regs being updated to allow this to be coded as Qualified if 5 year hold period was met and retired at age 55 or after and pulled from Roth 401k?



Submitted by Alan - IRA critic on Thu, 2016-09-22 16:35

  • Such a distribution before 59.5 would not be qualified barring disability or death of the participant. Unlike a Roth IRA, a designated Roth distribution is B regardless of qualified or NQ. B2 would apply to reflect a NQ distribution reflecting the age 55 separation exception. This would waive the penalty on the applicable amount of taxable earnings reported in Box 2a.  The contribution basis would also be shown in Box 5.
  • If the Roth 401k distribution was qualified (59.5 and 5 years), code B would still apply as the Q code only applies to Roth IRA distributions. For a qualified Roth 401k distribution, the instructions need an overhaul because they lack clarity. Obviously, there would be nothing in 2a, but Box 5 is still needed because the account could be underwater due to contributions exceeding current value. The contributed basis would be needed for a possible misc deduction, or if rolled to a Roth IRA that is not yet qualified, the Roth IRA basis would be increased more than the value of the Roth 401k rollover. Due to lack of clarity I would expect that for qualified Roth 401k distributions, boxes after 2a might vary from plan to plan.

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