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Roth 401K hardship withdrawal, to 60 day rollover to Roth IRA
Old 09-28-2017, 10:15 PM   #1
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Roth 401K hardship withdrawal, to 60 day rollover to Roth IRA

If someone takes an early hardship withdrawal (for college) from their company Roth 401K, and 2 weeks later decides they instead want to use that money to put into a Roth Ira (using the 60 day rollover rule), will that cause a problem?

A CPA said no it won't, nothing would happen, even though technically it is not supposed to be done because a 401 K hardship withdrawal should be used as originally intended. However, if the person changes their mind after getting the money, they won't be penalized.

The particular Roth 401K does not allow early withdrawals or rollovers while employed and under retirement age.
However, the CPA said that if the person calls their Roth IRA company (such as Vanguard or Merrill or Fidelity), and sends the check for the hardship money within 60 days of withdrawal, it will accept the Roth 401K money into the Roth IRA.

Has anyone ever done this or known of any negative consequences, in a situation where the Roth 401K clearly does not allow rollovers to an outside brokerage (Roth IRA or otherwise)?

Reading the IRS rules it says it can't be done if the 401K Roth won't allow it, which is the case here.

However, the CPA says that rule is not ever enforced by the IRS since 401K Roth plans vary and some allow it, some don't.
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Old 09-28-2017, 11:20 PM   #2
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You will be taxed on this action.

If you are working why not simply contribute to a ROTH either directly, or via an IRA and then transfer to a ROTH ?

Will you be mad at your CPA if the IRS disallows it and considers it a withdrawal with the 10% penalty as less than 59.5 ?
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Old 09-29-2017, 12:03 AM   #3
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Yes, it will result in only a 10 percent tax penalty, since it is from a Roth 401K.

The purpose of wanting to put it into a Roth IRA instead of a regular brokerage account is so the investing profits (from mostly long term index funds) are not taxed within the Roth IRA. If it were in a regular investing account, any profits would be taxed.

Not sure if there are any other disadvantages or issues. I can't think of any but maybe am missing something here.
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Old 09-29-2017, 12:38 AM   #4
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However, the CPA says that rule is not ever enforced by the IRS since 401K Roth plans vary and some allow it, some don't.
Hmmm, "that rule is not ever enforced" is the same as saying, there is a rule that states you are not allowed to do what you're suggesting.

I guess your CPA is telling you that it's your call. Personally, as a CPA, I think it would have been better to tell you that it's not allowed or to structure the transaction in a way that is allowed - if possible.

I don't practice any longer, but when I did, I was pretty conservative. I usually just asked my clients whether or not they were willing to deal with the stress of an audit if they've done something they know to be beyond taking the grey areas. Ultimately, they sign the tax return, pay the fine, go to jail . . . are responsible.
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Old 09-29-2017, 12:48 AM   #5
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Yes, it will result in only a 10 percent tax penalty, since it is from a Roth 401K.
How do you know that they would only impute the 10 percent penalty? They might go after any earnings. They may seek to dissolve the Roth IRA. They may end up doing nothing serious in terms of penalty, but plenty to run up your CPA/Legal bills and suck some life blood from you.

And worst of all, when the spammers call and say they're from the IRS and that they're going to put you in jail if you don't pay them with gift cards, you'll be caught off guard and comply. (okay, maybe you're smarter than that, but do consider what your time and your conscience are worth)
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Old 09-29-2017, 07:49 AM   #6
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I'm with Jerry. Worst case is that the final determination is that you need to pay the 10% penalty on the withdrawal and the Roth IRA deposit is excessive and also subject to penalty.

I think it would be preferable to try to find another way... can you unwind the hardship withdrawal?
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