The $5.1k moved to the Roth 401(k) by In-plan Roth Rollover (IRR) will consist of $4.1k that would be subject to a 10% early-distribution penalty if distributed before 5-years from the beginning of the year in which the IRR occurred and $1k that would be penalty-free no matter when it was distributed. None of the amount moved to the Roth 401(k) in the IRR becomes earnings in the Roth 401(k). Subsequent earnings within the Roth 401(k) would be taxable and subject to 10% early-distribution penalty if distributed early. Nonqualified distributions consist of proportionately of taxable amounts (earnings in the Roth 401(k)) and nontaxable amounts (attributable to the IRR), with the $4.1k that was taxable in the IRR coming out before the $1k that was not taxable in the IRR. So if there were no earnings in the Roth 401(k) after the IRR, the first $4.1k distributed would be subject to penalty if the distribution was made before the completion of the 5-year IRR holding period. (See IRS Notice 2010-84.) If there were earnings within the Roth 401(k), the distribution would be a mix of amounts subject to tax and penalty and amounts that are not taxable but may be subject to penalty.
If one wants to make a partial distribution from a Roth 401(k) and there have been earnings within the Roth 401(k), one normally first rolls the entire Roth 401(k) over to a Roth IRA and then makes a distribution from the Roth IRA to take advantage of the more advantageous ordering rules for Roth IRA distributions. In the Roth IRA the $4.1k becomes basis in taxable Roth conversions with the 5-year IRR holding period carrying over from the Roth 401(k), the $1k becomes basis in nontaxable Roth conversions and the earnings within the Roth 401(k) become earnings in the Roth IRA. The ordering rules for distributions from a Roth IRA dictate that the earnings come out last rather mixed with nontaxable amount as they would be if distributed from the Roth 401(k). Keep in mind, though, that to roll money over to a Roth IRA you must be eligible to receive a distribution from the Roth 401(k). Hardship distributions cannot be rolled over.
