I'm 63 now and I opened the account when I was 60. Since I'm over the 59 1/2 age requirement do I still have to wait the 5 years before withdrawing the money to avoid the income tax?
Roth 401(k) plans combine features of traditional 401(k) plans with those of Roth IRAs. Participants can choose to contribute to a Roth 401(k) with after-tax dollars (in the same way one would contribute to a Roth IRA) or with pre-tax dollars (often called an elective deferral option, as the payment of income tax is deferred). Regardless of how the participant chooses to contribute, any employer-matched contributions are done with pre-tax dollars and both contributions and earnings are added to gross income at withdrawal. Employer-matched contributions are allocated to a pre-tax account and kept separate from any participant Roth contributions.
To withdraw from a Roth 401(k) without incurring any additional income tax, two criteria must be satisfied: the funds must remain in the account for at least 5 years starting the year of the first contribution, and the participant must be 59 ½. Distributions from the Roth portion of the plan meeting these criteria are considered qualified, and are not included in gross income. Distributions from the employer-match separate account are included in gross income as they were funded using pre-tax dollars.
An exception applies for participants who elect to have distributions made as part of a series of substantially equal periodic payments (SEPP) over his or her life expectancy (known as the exception to IRS Rule 72). The payments are calculated annually based on the December 31 account value of the prior year, and are determined by the required distribution method, the amortization method or the annuitization method. For qualified plans, like a Roth 401(k), the participant must separate from service with the employer maintaining the plan before distributions begin in order to be eligible for the exception.
In the scenario described above, only one of the criteria (age) is met. Distributions from the Roth portion of the plan would be considered non-qualified, and a portion of the distribution would be subject to income tax. The portion of the distribution allocable to the participant’s after-tax contribution would not be included in gross income; however, the portion allocable to earnings would be included. The portion allocable to the participant’s contribution would be determined by multiplying the amount of the non-qualified distribution by the ratio of designated Roth contributions to the total designated Roth account balance. For example, if the current account balance is $10,000 and the participant contributed $8,000, 20% (the percentage of the account balance from earnings) would be included in gross income. If the participant is no longer employed with the employer sponsoring the plan, he or she could elect to have distributions made as part of a SEPP plan to avoid early withdrawal tax penalties.
As with any retirement plan, always consult the plan administrator or a financial professional to determine the tax implications of distributions based on individual circumstance.
** The information provided should not be interpreted as a recommendation, no aspects of your individual financial situation were considered. Always consult a financial professional before implementing any strategies derived from the information above.
With a Roth 401(k) the first qualified withdrawal (without penalty) begins 5 years from the first year of your first contribution to the plan. In your case, the year you were age 60. In contrast, for a Roth IRA, the 5 year period begins in the year to which your first contribution was attributable. Say you made a Roth IRA contribution in March 2009 for the 2008 tax year. The 5 year period for the Roth IRA begins Jan. 1, 2008. Check with your plan administrator. You may be able to do an in-service rollover while still working. If you roll your Roth 401(k) to your previously established (longer than 5 year) Roth IRA, you may implement the qualified withdrawal. Always check with your tax advisor before making important tax decisions.
You are always eligible to withdraw the amount contributed to a ROTH IRA without penalty, irrespective of the holding period or your age (i.e. you can contribute on Monday and withdraw the same amount on Friday). The 5 year rule applies to designated ROTH accounts and to earnings on contributory ROTH IRAs. The IRS website provides a detailed explanation of the rules along with examples to illustrate the treatment here: http://www.irs.gov/publications/p590/ch02.html#en_US_2011_publink1000231054 . Pay particular attention to the Ordering Rules (http://www.irs.gov/publications/p590/ch02.html#en_US_2011_publink1000231071) and consult with your financial advisor or tax advisor regarding your particular circumstances.
A side note: the penalty, in dollar terms, for an early withdrawal on a designated ROTH (like a ROTH 401k) may be quite small, as it is assessed on the earnings not the total value of the account.
The principal contributed is always yours to withdraw at any time without penalty. Only the earnings are impacted by the five year rule.
