Roth 401k
A client has a large balance in the Roth portion of his 401k.
If is looking to retire at age 55.
How do the distributions work as far as taxes for the Roth portion?
Do Roth contributions come out first (i.e. no tax) or is it “cream in the coffee”?
Permalink Submitted by Alan - IRA critic on Fri, 2021-05-14 21:58
It is pro rata with earnings, similar to the cream in coffee situation. Therefore, it would be better to roll the Roth portion to a Roth IRA, and if possible leave the pre tax portion in the 401k for penalty free distributions due to age 55 separation. When Roth 401k is rolled to a Roth IRA, the Roth contributions are treated as regular Roth IRA contribution basis and can be withdrawn tax and penalty free. Earnings are added to Roth IRA earnings and come out last. Client should find out if the plan provides flexible distributions after retirement, or would require a lump sum distribution.