Roth 401k Withdrawal penalties/taxes?

[coubs3]

I left my last job and I am looking at taking some money out of my Roth 401k for personal reasons.

I assume there with be a 10% penalty, correct?

Will I owe taxes?  

If not why are they asking to withhold 20% for federal?  I am also located in Virginia if there is something with the state I have to worry about.  I am trying to make sure I have my ducks in a row come tax time.  So any and all information is useful.

[dmertz · Accepted solution]

Distributions from a Roth 401(k) are prorated between nontaxable amounts (your original Roth contributions) and taxable amounts (earnings).  The law requires that the payer withhold a minimum of 20% of the taxable portion of the distribution for federal taxes.  Presumably you are under age 59½, so the distribution is subject to a 10% early-distribution penalty on the taxable portion of the distribution.

You would likely do better to roll some or all of the Roth 401(k) over to a Roth IRA and then take distributions from the Roth IRA.  Doing so would result in your Roth 401(k) contribution basis becoming contribution basis in the Roth IRA.  Under Roth IRA ordering rules distributions are not prorated between taxable and nontaxable amounts but, instead, your contribution basis is distributed first, tax and penalty free.  It won't be until you dip into the earnings that you will begin to distribute from the Roth IRA portions that are subject to tax and penalty.

To avoid the 20% mandatory withholding on the movement of the Roth 401(k) to the Roth IRA, the movement must be done by direct rollover, with the plan making the distribution payable to the Roth IRA for your benefit.  If you don't already have a Roth IRA account you'll need to establish the account to receive the direct rollover, then provide the information to the 401(k) plan administrator so that they can make the payment to that account.

Virginia taxes Roth IRA distributions the same way, so, again, you'll benefit from rolling the Roth 401(k) over to a Roth IRA first.

The 401(k) plan may have restrictions on the frequency of distributions.  If so, you'll want to take that into account in determining the amount to roll over to the Roth IRA.  Whatever amount you do roll over, you'll want to make sure that the portion of the distribution from the Roth 401(k) that is nontaxable is large enough to meet your needs when later distributed from the Roth IRA.

[goldnson]

if a t\x expert is available to answer - I am 57 and was recently hurt at work and am disabled for at least 6 months.  I have a lot of money invested in Roth IRA and would like to draw on those funds.  Is there any penalty or fees associated to draw funds out?

[dmertz]

The original question asked and answered was about distributions from a Roth 401(k), not from a Roth IRA.

Regarding distributions from a Roth IRA, since are not yet age 59½, your Roth IRA conversion basis more than 5 years old and your Roth IRA contribution basis in your Roth IRAs can be distributed at any time tax and penalty free.  Your Roth IRA conversion basis less than 5 years old can be distributed tax free but will be subject to a 10% early-distribution penalty unless you have a penalty exception applies.  Your earnings in the Roth IRA will be subject to ordinary income tax and, if you have no penalty exception that applies, to a 10% early-distribution penalty.

For the disability penalty exception to apply, your disability must be expected to result in death or be of a long, continued and indefinite duration, as attested to by your physician.

So as not to get the original question too far off track, goldnson, if you need more information, please ask a separate question that can address your specific details.