Roth 401(k) Withdrawals after Age 55

Submitted by Bob Foland on Wed, 2022-09-14 20:02

Client was laid off at age 57. She has a Roth 401(k). Given that she’s past age 55, a traditional 401(k) would allow her to take penalty-free withdrawals. How does this rule affect withdrawals from a Roth 401(k)? Does the five-year rule apply?



Submitted by David Mertz on Wed, 2022-09-14 20:38

  • I assume that the Roth 401(k) is with the employer from which she was laid off.
  • Separation from service in or after the year she reaches age 55 does not change the age-59½ qualification requirement.  Because she has not yet reached age 59½, distributions to her from the Roth 401(k) would be a proportionate mix of nontaxable contribution basis and taxable earnings.  However, because she separated from service with this employer in or after the year she reached age 55, there is no early-distribution penalty.  Once she has met both the age-59½ and 5-year qualification requirements in a few years, distributions from the Roth 401(k) will be entirely tax- and penalty-free.
  • If she rolls the Roth 401(k) over to a Roth IRA, distributions will be taxable according to Roth IRA ordering rules.   If the rollover occurs before meeting the Roth 401(k) qualification requirements, contribution basis in the Roth 401(k) will become contribution basis in her Roth IRAs.  If the rollover occurs after the Roth 401(k) is qualified, the entire amount rolled over will become contribution basis in her Roth IRAs.

Submitted by Alan - IRA critic on Wed, 2022-09-14 20:48

  • Her separation from service at 55+ will waive the 10% penalty on the taxable portion of Roth 401k distributions. However, because the Roth 401k is not yet qualified due to not being 59.5, a portion of each distribution will be allocated to gains in the Roth 401k and will therefore be taxable. 
  • Instead, if she rolled the Roth 401k into a Roth IRA and took Roth IRA distributions, then the gains would come out last, and the amount she contributed to the Roth 401k would come out first without tax and penalty. If she reached 59.5 before reaching the amount of gain from the Roth 401k, when the gains are finally distributed there would be no penalty. And if she had a Roth IRA before this and held it 5 years by the time she reached 59.5, the entire Roth IRA would be tax and penalty free. Therefore, to determine which option is better she needs to determine how much Roth 401k gain there is, whether the plan will allow partial distributions as needed, and whether she already has a Roth IRA or not. Note: If she did in plan Roth rollovers to the Roth 401k, that changes and complicates the above response.

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