Author Topic: Roth 401k Withdrawal?  (Read 548 times)

Cadman

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Roth 401k Withdrawal?
« on: July 26, 2019, 08:13:55 AM »
I have a question concerning Roth 401ks Im hoping someone can answer.

DW FIREd last October and Ive been working on getting our ducks in a row for my potential FIRE in the next year or two. In completing paperwork to move her 401k over to a VG tIRA, we discovered she had, at some point, contributed to a Roth 401k. Both her employment records and retirement acct records only go back 3 years so this predates that.

Were going to move forward with just moving the pre-tax 401k money to VG while trying to determine her contribution amount for the Roth. My question is, being post-tax money, can she have the contribution portion disbursed to her as a tax-free, penalty-free withdrawal? Wed then move the earnings portion over to a VG Roth IRA.

Allowable?

MDM

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Re: Roth 401k Withdrawal?
« Reply #1 on: July 26, 2019, 08:34:04 AM »
My question is, being post-tax money, can she have the contribution portion disbursed to her as a tax-free, penalty-free withdrawal?
Short answer is "yes".

Longer answer is "yes, but why do you want to withdraw Roth money now, rather than use other sources now and allow the Roth to compound tax free?"

See also Two 5-Year Rules For Roth IRA Contributions & Conversions.

Cadman

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Re: Roth 401k Withdrawal?
« Reply #2 on: July 26, 2019, 09:39:46 AM »
Thanks. The primary idea being, we're only talking around $15k, and I suspect 2/3 of that were post-tax contributions. Perfect for funding deductible tIRAs now that we're deduction-eligible, and then we'd move the earnings portion to a VG Roth IRA to get lower fees.

Now, looks like the 5-year clock restarts on the Roth rollover. I assume that the earnings portion doesn't magically get reclassified as a contribution just because of the roll-in?

Edit: Found the answer to part 2. https://money.stackexchange.com/questions/36962/if-you-rollover-a-roth-401k-to-roth-ira-and-immediately-withdraw-it-is-there-an
« Last Edit: July 26, 2019, 09:48:51 AM by Cadman »

MDM

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Re: Roth 401k Withdrawal?
« Reply #3 on: July 26, 2019, 10:00:09 AM »
Thanks. The primary idea being, we're only talking around $15k, and I suspect 2/3 of that were post-tax contributions. Perfect for funding deductible tIRAs now that we're deduction-eligible, and then we'd move the earnings portion to a VG Roth IRA to get lower fees.
Taking $10K out of a Roth account (that is completely tax free) in order to put it into a traditional account (from which tax will be due on withdrawal) doesn't make sense at first glance.  Have you done more detailed calculations?

Cadman

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Re: Roth 401k Withdrawal?
« Reply #4 on: July 26, 2019, 11:48:38 AM »
Yeah, at first glance it looks like double-taxation. My thought is that when it comes time to withdraw or convert, we'll be in a low/no tax bracket. This tax year, DW qualifies for 100% tIRA deductibility, and we both should be next year, so why not take advantage.

You do have a point though. If the whole thing is rolled over, it won't count towards the annual IRA contribution limit, which I'll end up maxing one way or another anyhow, so greater potential for long term growth there. But at least it's an option to consider.

terran

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Re: Roth 401k Withdrawal?
« Reply #5 on: July 26, 2019, 01:39:49 PM »
Thanks. The primary idea being, we're only talking around $15k, and I suspect 2/3 of that were post-tax contributions. Perfect for funding deductible tIRAs now that we're deduction-eligible, and then we'd move the earnings portion to a VG Roth IRA to get lower fees.
Taking $10K out of a Roth account (that is completely tax free) in order to put it into a traditional account (from which tax will be due on withdrawal) doesn't make sense at first glance.  Have you done more detailed calculations?

It would make sense if, and only if, they're in a higher tax bracket now than they will be in retirement (likely) and they can't afford to contribute anything to their t.IRA's now. If they have enough income not already being tax sheltered that they don't need to spend or have any investments in taxable accounts I would contribute to the t.IRA's from those sources instead of from the Roth though.

seattlecyclone

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Re: Roth 401k Withdrawal?
« Reply #6 on: July 29, 2019, 04:18:21 PM »
Were going to move forward with just moving the pre-tax 401k money to VG while trying to determine her contribution amount for the Roth. My question is, being post-tax money, can she have the contribution portion disbursed to her as a tax-free, penalty-free withdrawal? Wed then move the earnings portion over to a VG Roth IRA.

I'd recommend you move the entire sum into the Roth IRA before you try to take a free withdrawal of principal. The reason is that withdrawals directly from a Roth 401(k) are pro-rated between principal (which is tax-free when withdrawn early) and earnings (which are not). Once the money hits the Roth IRA it is subject to the more favorable withdrawal ordering rules that allow you to take the free principal out first before touching the earnings.

Cadman

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Re: Roth 401k Withdrawal?
« Reply #7 on: July 31, 2019, 12:59:59 PM »
Were going to move forward with just moving the pre-tax 401k money to VG while trying to determine her contribution amount for the Roth. My question is, being post-tax money, can she have the contribution portion disbursed to her as a tax-free, penalty-free withdrawal? Wed then move the earnings portion over to a VG Roth IRA.

I'd recommend you move the entire sum into the Roth IRA before you try to take a free withdrawal of principal. The reason is that withdrawals directly from a Roth 401(k) are pro-rated between principal (which is tax-free when withdrawn early) and earnings (which are not). Once the money hits the Roth IRA it is subject to the more favorable withdrawal ordering rules that allow you to take the free principal out first before touching the earnings.

I figure that's what I'm going to do. Plus the record keeping at the current provider is abysmal (no online tax doc access, either) so that's another perk of moving it all to VG first.