I have some follow-up questions about the “Roth 401(k) Withdrawals after Age 55” September 2022 forum discussion.

That discussion specifically addresses part of my question about the rule of 55 on an account with both Roth and pre-tax assets. Here is the relevant part of that discussion:

HER SEPARATION FROM SERVICE
Permalink Submitted by Alan-iracritic@… on Wed, 2022-09-14 16:48
1. 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.
2. 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.

My Follow-up Questions:

From the second paragraph of the post above I conclude that if the employee rolls over the entire Roth portion of their 401(k) account into a Roth IRA then the IRA withdrawal ordering rules are in effect and he/she can withdraw the Roth contributions that were made in the 401(k) plan prior to the rollover at anytime or any age without tax or penalty.

I am confused why the post also talks about having to withdraw a proportional mix of Roth taxable (earnings prior to age 59 1/2 and non-taxable contributions). If rolling over the entire 401(k) Roth into an IRA Roth puts the IRA Roth withdrawal ordering rules in effect (allowing tax & penalty free withdrawal of contributions), why would anyone not go that route?

Under the rule of 55 the Traditional pre-tax funds can be withdrawn and taxed without penalty or rolled into a Traditional IRA. Can you do a mix?

Since employer matches had to be pre-tax (prior to Secure 2.0) nearly all 401(k) accounts with Roth assets also have pre-tax assets. Does having both Roth and pre-tax assets in the account change any of these rules? Specifically for a 401(k) account with both Roth and pre-tax assets that qualifies for the rule of 55 withdrawal:

1. Can the employee rollover the entire Roth portion to an IRA and immediately withdraw all the Roth contributions tax and penalty free? The answer seems to be yes based on the September 2022 forum post above.

2. Can the employee also take a taxable penalty free withdrawal of the 401(k) pre-tax funds or roll the balance of the pre-tax funds into a Traditional IRA? I am fairly confident this is true since the rule of 55 allows the penalty free withdrawal and severance from an employer at any age enables a rollover to an IRA.

3. Does the rule of 55 allow a mix and match of pre-tax withdrawal and rollover? For example can the employee withdraw a portion of the pre-tax assets, pay the tax without penalty, and roll the balance into a Traditional IRA?

4. Does this proportional mix issue come into play in this scenario? Based on forum post above if the entire Roth part of the account is rolled over to a Roth IRA I don’t see where this is required.

Thank you,
Steve Peterson CRPC®
Principal
Personal Financial Advice & Insights, LLC