403b ROTH PLANS distribution question

Submitted by Vickie Intriago on Thu, 2020-05-07 17:06

Client is turning 59 1/2 in September yet still employed with his school district. He has been funding his ROTH 403b plan.
If he has opened this account over 5 years ago is he able to access all of the money tax free?

If he has not had account open for 5 years then would he be limited to his contributions only in order to not be taxed?

I am trying to convince client to hold off until he reaches age 59 1/2 to take his contributions.

Thanks!



Submitted by David Mertz on Thu, 2020-05-07 21:15

  • If he takes a distribution after age 59½ and has met the 5-year qualification, distributions from the Roth 403(b) are entirely tax free.
  • If he takes a distribution after age 59½ but has not met the 5-year qualification period, distributions are a pro rata mix of nontaxable contributions and taxable gains.  Only Roth IRAs are subject to ordering rules that have contributions come out first.  Distributions from Roth 401(k), Roth 403(b), Roth 457(b) and federal Roth TSP accounts are proportionate mixes.  Under age 59½ the taxable portions of these distributions are also subject to the 10% early-distribution penalty (unless he has some other exception that applies, which is unlikely if he is still working).

Submitted by Alan - IRA critic on Thu, 2020-05-07 21:50

Agree, and if client is still working they are not eligible for a distribution of the Roth deferrals before 59.5 and most likely not eligible for distributions of the earnings either, with the exception of hardship distributions if offered or corona virus distributions if the client qualifies and the plan offers these. In fact, even after 59.5 the client may not be eligible for in service distributions in many 403b plans. Client should drop the idea of any distributions until 59.5 and then look into the plan options at that time when the issue will no longer be taxes, but rather eligibility for a distribution at all.

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