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Level 1
posted Jul 26, 2023 9:36:41 AM

Roth 401K

My understanding is that my Employee contributions are tax free and penalty free. 

1. What about my Employer Match amount and interest Gains for the last 12 years if I rollover to Roth IRA.

2. What about "5 year Rule"?

0 2 689
2 Replies
Employee Tax Expert
Jul 26, 2023 9:43:58 AM

Hi, Jeff!

 

If you have had your Roth IRA for 5 years or longer, none of your distributions will be subject to tax regardless of where the investment came from (you or your employer).  If you have not had the account for the 5 year required period, your earnings will be taxed as ordinary income.  The return of your investment won't ever be taxed at withdrawal as you never received a tax benefit when you made the investment (made with after tax funds).

 

If you make any withdrawal before reaching a minimum age of 59.5 years, your earnings will be subject to both income tax at ordinary tax rates and the 10% early withdrawal penalty.

 

Regards,
Elizabeth W
EA for 29 years

Level 15
Jul 26, 2023 12:20:19 PM

Prior to qualification upon reaching age 59½ and completing the 5-year qualification period, distributions from a Roth 401(k) are always a proportionate mix of nontaxable contributions and taxable gains.  Taxable gains distributed before age 59½ are subject to a 10% early-distribution penalty unless an exception applies.  If you are under age 59½ and eligible to take distributions from the Roth 401(k) due to having separated from service, you can roll the taxable gains over to a Roth IRA to avoid tax and penalty on the gains.