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Roth 401K withdrawals with coronavirus bill
Old 01-01-2021, 08:37 AM   #1
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Roth 401K withdrawals with coronavirus bill

Hey all,

Here's the situation:
56.5 YO, retiring next week.
62K in my 401K roth, which I've had less than 5 years.
Have another external roth that I've had for many years, but I don't think that matters.
Coronavirus relief bill allows for 100K withdrawal from 401K's without penalty.
Need cash for a vacation home.

Questions:
Should I be able to withdraw the full 401K Roth amount penalty and tax free for vacation home, or any other purpose?
In the week before retirement should I max out this roth for 2021 so it can (hopefully) grow until time to buy the house later this year? Have to act fast as I think I only have 1 1/2 paychecks left to work with.

As you can probably tell from my recent activity here, it's crunch time for me, hopefully I don't wear out my welcome :-)

EDIT: On continued research it looks like the 100K withdrawal needs to be coronavirus related, so probably a no go. I guess I could claim I need a house in the mountains to escape the virus LOL.
Also, It also looks like any withdrawal from a Roth 401K (as opposed to traditional Roths) are pro-rated between original contributions and gains, with the gains being taxed and penalized since they wouldn't be qualified. I think the only option might be to roll over the full amount into an external Roth, at which point I think the original contributions could be pulled out without penalty or pro-ration.

Info source: https://www.fool.com/retirement/plan...1k/withdrawal/
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Old 01-01-2021, 10:26 AM   #2
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In order to take a Coronavirus distribution, you would have had to withdraw the funds by December 30, 2020, so that's not an option now anyway.

With regard to the rollover idea, do you already have an existing Roth IRA in addition to the Roth 401(k)? If so, what was the first year you contributed to it? Make sure you understand the 5 year rule and how it works for rollovers.

My understanding is that if you don't have an existing Roth and you rollover your Roth 401(k) into a newly created Roth IRA account this year, then any withdrawal of the earnings will be subject to income taxes until January 1, 2026, and also to the 10% penalty until you turn 59 1/2 (in 2023?). If you do already have a Roth IRA, then the rollover takes on the age of the existing account, even if you put the rollover into a different Roth account; so as long as you opened a Roth IRA in 2018 or earlier, you'd be able to access the earnings tax and penalty free once you turn 59 1/2.

Yes, I think it's probably a good idea to max out the Roth 401(k) before you retire if your employer's plan allows you to put that much into it. You can always get the contributions back, and whatever earnings they manage to gain will be available tax free if you can wait for them.
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Old 01-01-2021, 08:28 PM   #3
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Quote:
Originally Posted by cathy63 View Post
Yes, I think it's probably a good idea to max out the Roth 401(k) before you retire if your employer's plan allows you to put that much into it. You can always get the contributions back, and whatever earnings they manage to gain will be available tax free if you can wait for them.
Thanks Cathy. My traditional Roth was opened in 1998.

Just a follow up regarding getting the contributions back, if I wanted to withdraw contributions fully penalty free I believe I would have to first roll the 401K Roth out into a traditional Roth, as 401K roth distributions don't allow you to withdraw only contributions. Also, even after rolling to an external Roth, I don't think I can withdraw earnings from it until I have cleared the five year rule for it, regardless of my age. i.e. the 5 year rule is still in effect even if you are over 59 1/2.

e.g. from the above linked article:
Early withdrawals are prorated between nontaxable contributions and earnings. To calculate the portion of the withdrawal attributable to earnings, simply multiply the withdrawal amount by the ratio of total account earnings to account balance. If your account balance is $10,000, made up of $9,000 in contributions and $1,000 in earnings, then your earnings ratio is 0.10 ($1,000 / $10,000). In this case, a $4,000 withdrawal would include $400 in taxable earnings, which would need to be included in the gross annual income reported to the IRS on your taxes.
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Old 01-02-2021, 08:54 AM   #4
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Thanks Cathy. My traditional Roth was opened in 1998.
I'm not sure what you mean by "traditional Roth"? That name is mixing two different account types. If you have a "Roth IRA" that you opened in 1998, you're good. If you have a "traditional IRA" that you opened in 1998, that won't help with the 5-year rule.

Quote:
Just a follow up regarding getting the contributions back, if I wanted to withdraw contributions fully penalty free I believe I would have to first roll the 401K Roth out into a traditional Roth, as 401K roth distributions don't allow you to withdraw only contributions. Also, even after rolling to an external Roth, I don't think I can withdraw earnings from it until I have cleared the five year rule for it, regardless of my age. i.e. the 5 year rule is still in effect even if you are over 59 1/2.

e.g. from the above linked article:
Early withdrawals are prorated between nontaxable contributions and earnings. To calculate the portion of the withdrawal attributable to earnings, simply multiply the withdrawal amount by the ratio of total account earnings to account balance. If your account balance is $10,000, made up of $9,000 in contributions and $1,000 in earnings, then your earnings ratio is 0.10 ($1,000 / $10,000). In this case, a $4,000 withdrawal would include $400 in taxable earnings, which would need to be included in the gross annual income reported to the IRS on your taxes.
Yes, this is correct. You have to do a rollover to get the contributions out.

The 5-year rule for the rolled over earnings depends on the age of your Roth IRA. If you have had a Roth IRA since 1998, and you rollover your Roth 401(k), then you've already cleared the 5-year rule and you can access the earnings tax and penalty free at age 59 1/2.

If you have only had a traditional IRA since 1998 and have never had a Roth IRA, then the 5-year clock starts from zero on January 1 of the year you do the rollover. In that case, you can access the earnings penalty free at age 59 1/2, but you will still owe ordinary income tax if you withdraw them before the 5 years is up.
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Old 01-02-2021, 09:15 AM   #5
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Thanks again Cathy. And yeah I never know what to call a non 401k Roth. Regular Roth?
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Old 01-02-2021, 09:54 AM   #6
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Thanks again Cathy. And yeah I never know what to call a non 401k Roth. Regular Roth?
"Roth IRA" should be unambiguous.
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Old 01-02-2021, 10:17 AM   #7
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Originally Posted by Out-to-Lunch View Post
"Roth IRA" should be unambiguous.
My pet peeve, so I nearly always call the ira an IRA, and the roth a ROTH.

I just tried looking it up, no luck.

IRA: Individual Retirement Account -> simple easy to understand the name
ROTH IRA: ________________________________ Individual Retirement Account ->

After digging I found the answer, and sadly it has NO meaning as it's named after the Senator that sponsored it.

History

Originally called an "IRA Plus", the idea was proposed by Senator Bob Packwood of Oregon and Senator William Roth of Delaware in 1989.[2] The Packwood–Roth plan would have allowed individuals to invest up to $2,000 in an account with no immediate tax deductions, but the earnings could later be withdrawn tax-free at retirement.[2]
The Roth IRA was established by the Taxpayer Relief Act of 1997 (Public Law 105-34) and named for its chief legislative sponsor, Senator William Roth of Delaware. In 2000, 46.3 million taxpayers held IRA accounts worth a total of $2.6 trillion in value according to the Internal Revenue Service (IRS). Only a little over $77 billion of that amount was held in Roth IRAs. By 2007, the number of IRA owners has jumped to over 50 million taxpayers with $3.3 trillion invested.[3]

https://encyclopedia.thefreedictionary.com/Roth+IRA
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Old 01-02-2021, 10:34 AM   #8
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So you have been one of those people unhelpfully spelling "Roth" in ALL-CAPS? A pet peeve of mine!

(Just teasing.)
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Old 01-02-2021, 11:15 AM   #9
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OK, so let me try to get the correct terms for the 4 different types of tax sheltered retirement savings apparatuses that most of us use:

401K, Roth 401K, Traditional IRA, Roth IRA

Or is simply "401K" ambiguous? Should it be Traditional 401K?
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Old 01-02-2021, 01:12 PM   #10
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Originally Posted by cathy63 View Post
The 5-year rule for the rolled over earnings depends on the age of your Roth IRA. If you have had a Roth IRA since 1998, and you rollover your Roth 401(k), then you've already cleared the 5-year rule and you can access the earnings tax and penalty free at age 59 1/2.
I wanted to clear this last point up... I was thinking the 5 year clock reset that happens with Roth conversions would apply here, but this is a roll over, not a conversion. So, as you state, a straight Roth 401K to Roth IRAs roll over will inherit the clock of my oldest Roth IRA from 1998. That's another plus of the roll over because the Roth 401K clock just started it's second year on Jan. 1.
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Old 01-02-2021, 03:21 PM   #11
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I'm not sure what you mean by "traditional Roth"? That name is mixing two different account types. If you have a "Roth IRA" that you opened in 1998, you're good. If you have a "traditional IRA" that you opened in 1998, that won't help with the 5-year rule.







Yes, this is correct. You have to do a rollover to get the contributions out.



The 5-year rule for the rolled over earnings depends on the age of your Roth IRA. If you have had a Roth IRA since 1998, and you rollover your Roth 401(k), then you've already cleared the 5-year rule and you can access the earnings tax and penalty free at age 59 1/2.



If you have only had a traditional IRA since 1998 and have never had a Roth IRA, then the 5-year clock starts from zero on January 1 of the year you do the rollover. In that case, you can access the earnings penalty free at age 59 1/2, but you will still owe ordinary income tax if you withdraw them before the 5 years is up.


Also be aware, that all of the matching that your company did into your Roth 401(k) is not, and will never be considered Roth. All that match money will be transferred to a traditional IRA account when you do the rollover. So less will be going into your Roth IRA than you might think.
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Old 01-02-2021, 08:41 PM   #12
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Also be aware, that all of the matching that your company did into your Roth 401(k) is not, and will never be considered Roth. All that match money will be transferred to a traditional IRA account when you do the rollover. So less will be going into your Roth IRA than you might think.
Good point. To tell the truth I never thought about the match and where it has been going, but I do look at the running total of contributions and earnings on my 401K website, so I know how large it is and the splits with about 3 weeks of contributions remaining to be added. Since almost all of the remaining income will be going to the Roth, the match will be a minor part of that.
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