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Returning Member
posted Jul 10, 2019 8:38:48 AM

Early Roth 401k withdrawal

I'm going to be withdrawing funds from my Roth 401k to cover medical expenses for my husband and I. How do I ensure that I don't get a 10% penalty? I stay at home so the 401k is with my previous employers plan.

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5 Replies
Level 15
Jul 10, 2019 9:36:39 AM

Answer removed.

Level 15
Jul 10, 2019 9:42:32 AM

I have deleted the answer that I posted earlier. It might not be correct. Hopefully someone who knows more about it that I do will answer your question.

Level 15
Jul 10, 2019 12:28:34 PM

Distributions from a Roth 401(k) are a proportional mix of contributions and earnings, so unless the investments lost value, some amount will be taxable and subject to early-distribution penalty unless the taxable portion is rolled over.  To avoid the tax and penalty you can either receive a distribution and roll the taxable portion over to a Roth IRA (rollovers consist first of the taxable portion of the distribution) although there would be some mandatory tax withholding doing this, or, probably preferably, asking the 401(k) plan to directly roll the entire distribution (perhaps the entire Roth 401(k)) over to a Roth IRA (avoiding mandatory tax withholding) and then take out just your contributions using the Roth IRA ordering rules which dictate that your original contributions to the Roth IRA come out first, tax and penalty free.

Not applicable
Jul 10, 2019 12:41:24 PM

does your previous employers plan even allow for such distributions?

 

Any portion of a nonqualified distribution that comes from earnings will be subject to the 10% penalty unless  the following requirements is met - this is for your situation. there are also others where no penalty is involved 

the distribution does not exceed the amount of medical expenses that you can claim as an itemized deduction for the year.

 

this means that the qualified portion is the total qualified expenses reduced by either 7.5% or 10% of your adjusted gross income (AGI)   say your  is $40,000 and your medical expenses are $35,000  if the 10% applies the $35k must be reduced by $4k leaving only   $31k that can be withdrawn penalty free.   

Level 15
Jul 10, 2019 1:07:14 PM

For 2019 and later the threshold for medical expenses is 10% of AGI for everyone. The new tax law eliminated the 7.5% threshold starting in 2019.