Roth 401k Distribution Rules vs Roth IRA Distribution Rules

 

The beauty of the Roth account is their tax free withdrawals, and of course the tax-free growth over years and years of savings and investment. But how do you actually use your Roth funds? Roth IRA / Roth 401k distribution rules are different. In both cases, the Roth funds will likely be withdrawn eventually, but to take full advantage of the rules and have the entire withdrawal made tax-free, the withdrawals must be qualified.

 

Roth 401k distribution rules must be followed

Roth 401k distribution rules are different from distributions from a Roth IRA

Qualified withdrawals from a Roth 401k must follow these rules:

  • The Roth 401k must have been funded at least 5 years prior to the distribution
  • The owner must be 59 and 1/2 years old, dead, or disabled
  • And of course, termination of employment (though many 401k plans have loan features)

What’s a bit different with the Roth IRA is that ALL of your Roth IRA’s are the same for the 5 year rule purposes. It’s as if they’re one account no matter what, and the first contribution is the determining year. This means only one of your Roth IRA’s needs to have been funded at least 5 years prior to the distribution.

With the Roth 401k however, each 401k Roth is considered separate. So if you’re actually withdrawing from the Roth 401k itself (meaning you didn’t roll over to a Roth IRA) that specific plan has it’s own separate requirements. Essentially your Roth 401k plan accounts aren’t aggregated for distribution and tax purposes.

 

What Are The Roth 401k Distribution Rules If You Have Multiple Plans?

If you have multiple Roth 401k accounts, the smart thing to do would be combine them into the most current Roth 401k (assuming you currently have a great low cost highly diversified 401k plan). For example, if you have a 5 year old Roth 401k sitting around and you now take a new job and contribute to your Roth 401k, you should combine them. Doing so allows you the OLDEST contribution date as your Roth 401k starting year, making potential current distributions qualified (and therefore tax and penalty free) should you retire after age 55. Of course, not every 401k plan allows incoming rollovers of pre-tax or even the Roth nature.

If you’re a workaholic and still grinding at age 70+ you must make Roth distributions from your 401k – this is 180 degrees opposite of your regular Roth IRA account where (currently, though I feel this will change) there are no required minimum distributions at age 70 and 1/2. Based on your 401k plan however, you may be able to roll your 401k into both an IRA (for pre-tax) and a Roth IRA (for the Roth monies) to at least avoid the required distributions on your Roth 401k account.

Unlike Roth IRA’s, another neat little Roth 401k plan trick is how age 55 Roth 401k distributions work. If you’re age 55 or older and want to distribute some or all of your Roth 401k, provided you separate service (quit or get fired etc.) your distributions will avoid the non-qualified Roth 401k distribution penalty. The trick is you have to distribute the Roth funds from your Roth 401k, meaning you cannot roll them into a Roth IRA then distribute them – they must come from the Roth 401k plan directly. For the distribution ruling check out IRS 5329.

 

How are the Roth 401k-Roth IRA Distribution Rules Different?

For early retirees (age 55 to age 59 and 1/2) or late retirees (after age 70 and still working), the Roth 401k distribution rules are a bit different than the Roth IRA distribution rules. For most everyone else, they’re generally identical. The key is knowing what situation you’re in, and more importantly how pre-tax and Roth distributions affect your tax situation.