In Today’s Episode
- Distributions from Roth 401(k)s are NOT the same as distributions from Roth IRAs. With Roth IRAs, contributions come out first tax and penalty free. With Roth 401(k)s, distributions are subject to the so-called “cream-in-the-coffee” rule – all distributions take out contributions and earnings (which is bad news – the earnings piece is taxable and likely subject to the 10% penalty).
- As a practical matter, the employer may not allow in-service Roth 401(k) distributions.
- Rolling a Roth 401(k) to a Roth IRA can largely solve the above problem. If you are under age 59 1/2 (or have not held the Roth 401(k) for 5 years), the contributions to the Roth 401(k) go into the Roth IRA as “contributions” (i.e., they can be withdrawn tax free) and the growth goes into the Roth IRA as “earnings.”
- If you are both 59 1/2 or older and you have had THAT Roth 401(k) for 5 years, if you roll the Roth 401(k) to a Roth IRA, it ALL goes in as contributions.
- You can roll a Roth 401(k) into a Roth IRA. But you cannot roll a Roth IRA into a Roth 401(k).
Resources Mentioned In Today’s Conversation