Will I owe taxes (federal or state) if I withdraw from my ROTH 401k if I qualify under CARES act?

[Opus 17]

The CARES act only eliminates the 10% penalty for early withdrawal.

With a Roth IRA, you can always withdraw your original contributions at any time without tax or penalty, and COVID does not change that.

When you withdraw earnings from a Roth IRA, you are subject to income tax if the withdrawal is not qualified.  To be qualified, you must be age 59-1/2 or older, AND the Roth IRA must have been open at least 5 years.  You are also subject to a 10% penalty if you make any withdrawal before age 59-1/2.  The CARES act removed the 10% penalty but not regular income taxes for non-qualified withdrawal of earnings. 

[dmertz]

Unless the distribution is a qualified distribution, which is presumably not the case here, distributions from a Roth 401(k) are a proportionate mix of nontaxable contributions and taxable earnings.  Distributions from a Roth 401(k) do not follow the ordering rules for Roth IRAs.

[Opus 17]

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@dmertz wrote:

Unless the distribution is a qualified distribution, which is presumably not the case here, distributions from a Roth 401(k) are a proportionate mix of nontaxable contributions and taxable earnings.  Distributions from a Roth 401(k) do not follow the ordering rules for Roth IRAs.

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Fudge, I always miss that part.  

So the taxpayer will pay income tax on part of the withdrawal, depending on the mix of contributions and earnings.  The plan trustee should be able to help you figure that out.  There is no 10% penalty if you certify that the distribution was COVID related. 

[Opus 17]

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@dmertz wrote:

Unless the distribution is a qualified distribution, which is presumably not the case here, distributions from a Roth 401(k) are a proportionate mix of nontaxable contributions and taxable earnings.  Distributions from a Roth 401(k) do not follow the ordering rules for Roth IRAs.

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However, if the employee happens to be separated from service from the employer who sponsored the Roth 401(k), he or she could first roll it over into a private Roth IRA, and then take a distribution of contributions tax-free?  Or do the ordering rules persist? 

[dmertz]

Yes, the distribution from the Roth 401(k) could be rolled over to a Roth IRA, then the Roth IRA ordering rules would apply to distributions from the Roth IRA.  The part of the distribution from the Roth 401(k) that was attributable to contribution basis becomes contribution basis in the Roth IRA.

As an alternative, it should be possible to take an amount from the Roth 401(k) such that the portion of the distribution consisting of contribution basis is enough to satisfy the cash needs, then rolling the remainder, the taxable earnings portion, over to a Roth IRA (or perhaps even back into the Roth 401(k)).  § 402(c)(2) deems the rollover to come first from the taxable portion of the distribution from the 401(k) (in this case the Roth account in the 401(k)).  I haven't seen any explicit IRS guidance regarding this approach, particularly with regard to a CRD, but it seems that Form 8915-E will handle the repayment in this way by treating the repayment as being first a repayment of the taxable portion.  Assuming that this alternative is viable, which it appears to be, this alternative would be preferable to first rolling everything over to a Roth IRA.

The limitation on either approach is that if the taxable portion is rolled over to make the rest of the distribution entirely nontaxable, some portion of a maximum $100k CRD would have to be rolled over, resulting in less available for spending.