Is a CARES Act distribution from a Roth 401k fully taxable, or just the earnings portion? Could the distribution be used to fund a Roth IRA?

[dmertz]

Nonqualified distributions from a Roth 401(k) are a proportionate mix of contributions and earnings.  As with any nonqualified distribution from a Roth 401(k), only the earnings portion of a Coronavirus-Related Distribution (CRD) that is a nonqualified distribution is taxable.  Qualified distributions (after having had the account for 5 years plus, generally, having reached age 59½) are entirely nontaxable, CRD or not.

A CRD from a Roth 401(k) can be rolled back into the Roth 401(k) or over to a Roth IRA within 3 years of the date of the distribution.  The rollover consists first of the earnings portion of the distribution, so if all of the distributed earnings are rolled over, the tax on the distribution will be eliminated.

A distribution from a retirement account is not compensation which qualifies one to make a new contribution to an IRA.  The cash from a CRD can be used for any purpose, so it could be used to subsidize a Roth IRA contribution provided that the individual is eligible to make a Roth IRA contribution based on actual compensation.

[Opus 17]

You may be exempt from the 10% penalty if you can certify a coronavirus-related hardship, but all the other normal rules apply.  If this is a non-qualified distribution (before age 59-1/2, unless you separated from service with the sponsor at age 55 or after) then the tax rules described by @dmertz still apply.

[dmertz]

To be clear, there is no age-55 threshold for the distribution from a Roth 401(k) to be a qualified distribution, only the age 59½ threshold.  Separating from service with the employer providing the Roth 401(k) account in or after the year you reach age 55 is only an exception to the early-distribution penalty (which already would not apply to a CRD), not an exception to the earnings being taxable prior to age 59½.

[Opus 17]

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@dmertz wrote:

To be clear, there is no age-55 threshold for the distribution from a Roth 401(k) to be a qualified distribution, only the age 59½ threshold.  Separating from service with the employer providing the Roth 401(k) account in or after the year you reach age 55 is only an exception to the early-distribution penalty (which already would not apply to a CRD), not an exception to the earnings being taxable prior to age 59½.

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Thanks, did not know that. 

[Opus 17]

Also, if I understand the original question correctly, one of the things the taxpayer might want to do is move the money from the 401(k) to a private Roth IRA.  If the employee is separated from service, he or she can do a rollover or a direct trustee-to trustee transfer of the Roth 401(k) funds into a Roth IRA without penalty, without tax, and without even having to certify for the CARES act.  Once you separated from service with the 401(k) sponsor, you always have the right to rollover or transfer the money to a new qualified account, without tax consequences.

If the employee is still working for the 401(k) sponsor, they generally can't withdraw any money from the 401(k) unless the employer offers hardship withdrawals (not all employers allow this) and the employee qualifies for a hardship.  And in that case, I suspect the money can't be rolled over or transferred into a private Roth IRA.  The employee would have to take the withdrawal, pay any tax owed, and then make contributions to a new account if they were allowed to under the usual rules.