Author Topic: Roth 401(k) withdrawals  (Read 473 times)

FIRE 20/20

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Roth 401(k) withdrawals
« on: September 02, 2022, 10:06:10 AM »
I am very confused about Roth 401(k) withdrawals.  I have a lot of money in my Roth 401(k), and would like to take out the contributions before age 59 1/2 to support FIREd living expenses.  The contributions are all more than 5 years old.  After reading articles like https://www.investopedia.com/ask/answers/101314/what-are-roth-401k-withdrawal-rules.asp , it appears that withdrawals would be unqualified because I'm not 59 1/2.  That means I would need to pay taxes and a 10% penalties on the portion of the account that is growth.  The example they give is that if you made contributions of $9,000 and have $10,000 in the account, 10% is growth.  If I take $4,000 out, I would need to pay taxes and a 10% penalty on $400 of that amount.  Obviously, I'd prefer to avoid that.  In addition, I suspect that because I made my contributions a long time ago, my account might be closer to 50/50 growth and contributions, meaning I would pay a lot in taxes and penalties if I withdrew money from that account using that method. 

I actually don't have a Roth 401(k) any longer because more than 5 years ago I moved this money out of my employer's 401(k) program and into a Roth IRA.  My partner, however, was with our employer until FIRE and still has her Roth 401(k) account.  If she transferred her Roth 401(k) from our company's program into her Roth IRA, would that get around the penalty and tax issue?  Would that be immediate or would she need to wait 5 years?  What about my account?  As the contributions and transfer to the Roth IRA were both more than 5 years ago, can I just take out the contributions without penalty? 

Any help on this would be tremendously appreciated!  I'm worried enough about this that I may want to schedule a meeting with a financial advisor to make sure we stay within the rules.


seattlecyclone

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Re: Roth 401(k) withdrawals
« Reply #1 on: September 02, 2022, 10:37:27 AM »
As you point out, distributions directly from your Roth 401(k) are prorated between contributions and earnings. Distributions directly from your Roth IRA are ordered contributions first, then earnings. If you want to pay less tax right away the Roth IRA way is better. The good thing is that when you roll over your Roth 401(k) to your Roth IRA you immediately get the favorable distribution ordering rules: you can make a withdrawal up to the amount you originally contributed to the Roth 401(k), free of any tax. No need to wait five years.

People seem to invent five-year waiting periods where they don't exist. There are two five-year waiting rules when it comes to Roth IRAs:
1) In order to make a "qualified withdrawal" to get your earnings out tax-free, you need to be 59½ (or disabled or dead) and you need to have had a Roth IRA open for five years.
2) When you withdraw the principal from a pre-tax-to-Roth conversion, and you're still not 59½ (or disabled or dead), you'll pay a 10% early withdrawal tax if the conversion was less than five years ago.
That's it! Nothing says you have to wait five years to take your contributions back out, whether the money was once in a Roth 401(k) or not. This can happen immediately. The first five-year rule can be avoided by opening your first Roth IRA anytime before you turn 55. Do that and this rule is irrelevant for you. Then the only five-year periods you need to care about are from pre-tax-to-Roth conversions.

FIRE 20/20

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Re: Roth 401(k) withdrawals
« Reply #2 on: September 02, 2022, 12:26:32 PM »
Thank you, @seattlecyclone !

So if I understand you correctly, as all of my Roth 401(k) money was already moved to a Roth IRA, I can withdraw all of my contributions (not growth) immediately.  Obviously I should only take out what I need, but I could take out whatever I contributed to the original Roth 401(k) without any issues.

My partner needs to move her Roth 401(k) money to her existing Roth IRA, and once that's complete she too could remove her original Roth 401(k) contributions. 

Thanks again for the quick and clear response, assuming I summarized it correctly. 

seattlecyclone

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Re: Roth 401(k) withdrawals
« Reply #3 on: September 02, 2022, 12:45:20 PM »
Yep, you've got it!

 

Wow, a phone plan for fifteen bucks!