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Rule of 55 and Roth 401k
Old 01-19-2021, 06:21 PM   #1
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Rule of 55 and Roth 401k

Iím 55 and am hoping to retire in a year or 2. I have about 15% of my 401k balance in Roth and I started contributing to the Roth >5 years ago. I verified that my plan allows for monthly qualified withdrawals under the rule of 55. I was hoping to break up my monthly withdrawal with 50% pre-tax and 50% from Roth to keep my income down for ACA purposes. Does anyone know if I can withdrawal from the Roth portion of my 401k before 59.5? I read that in an IRA you can withdrawal just your contributions penalty and tax free, is it the same for 401k? I called to see what my Roth basis is (contributions vs earnings) and the woman seemed pretty clueless. They should have these figures, correct? This could be a show stopper for ER if I canít keep my income low enough for ACA subsidies. TIA
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Old 01-20-2021, 12:24 PM   #2
Confused about dryer sheets
 
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I was able to get my Roth cost basis. I guess I can always transfer the principle from 401k to IRA and then withdrawal penalty/tax free that way if I canít just withdrawal it directly from my 401k.

The other question I have is who determines if a 401k withdraw is qualified? I was under the impression that the provider (Prudential) coded it as such. The person I spoke to said they donít code it either way. Just trying to avoid getting hit with 10% penalty.
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Old 01-20-2021, 06:04 PM   #3
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You tell the IRS that it was a qualified withdrawal when you file your taxes. Form 5329 asks you why you have an exception to the 10% penalty, and you supply the reason. The rule of 55 exception is exception 01, according to the form instructions.
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Old 01-20-2021, 07:00 PM   #4
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If you withdraw directly from your Roth 401(k), then the withdrawal comes proportionally from your contributions and earnings, and even using the rule of 55, you would still owe tax on the earnings portion of the withdrawal.

Rolling the Roth 401k into a Roth IRA will allow you to take just the contributions out. If you touch the earnings prior to having a Roth IRA account for at least 5 years and reaching age 59 1/2, then you will owe tax and a 10% penalty on that money.
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Old 01-20-2021, 07:19 PM   #5
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^^ Thank you both, just the info I was looking for!!!
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Old 01-20-2021, 07:37 PM   #6
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Originally Posted by cathy63 View Post
If you withdraw directly from your Roth 401(k), then the withdrawal comes proportionally from your contributions and earnings, and even using the rule of 55, you would still owe tax on the earnings portion of the withdrawal.
Any penalty if I take directly from Roth 401k assuming Iíve had it more than five years but am not 59.5 yet?
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Old 01-21-2021, 01:05 PM   #7
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Any penalty if I take directly from Roth 401k assuming I’ve had it more than five years but am not 59.5 yet?
As Cathy mentioned above, your Roth 401k withdrawal will come proportionally from both the contributions and the earnings.

The earnings portions, in general, will trigger the 10% early withdrawal penalty, unless an exception is available, if you withdraw before age 59 and 1/2 or have had the Roth 401k in place for less than 5 years.

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Old 01-21-2021, 02:08 PM   #8
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Are you sure you can pick and choose which part of your 401K you can take a distribution from? In mine the Roth money comes out last when taking distributions, which is a good thing since my Roth is only 2 years old. Also if your Roth is more than 5 years old you might consider (as Cathy suggested) rolling it into a Roth IRA. Doing that you'll be able to immediately pull out just your contributions and not the earnings. I wanted to do this but was told I couldn't since my Roth 401K was less than 5 years old and thus wasn't qualified. Note that I too am covered under the rule of 55, but that doesn't help with Roth's that are less than 5 years old.
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Old 01-21-2021, 02:43 PM   #9
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Are you sure you can pick and choose which part of your 401K you can take a distribution from? In mine the Roth money comes out last when taking distributions, which is a good thing since my Roth is only 2 years old. Also if your Roth is more than 5 years old you might consider (as Cathy suggested) rolling it into a Roth IRA. Doing that you'll be able to immediately pull out just your contributions and not the earnings. I wanted to do this but was told I couldn't since my Roth 401K was less than 5 years old and thus wasn't qualified. Note that I too am covered under the rule of 55, but that doesn't help with Roth's that are less than 5 years old.
Who is telling you that you cannot rollover your Roth 401(k) into a Roth IRA after you leave your job? Is that info coming from the 401(k) custodian or the Roth IRA custodian? I'm pretty sure the IRS does not restrict rollovers like this, and I'm surprised that the 401(k) custodian would be allowed to do so. Once you separate from the company, you should be entitled to do whatever you want with that money. If I were you, I'd take a look at your 401(k) plan documents and see what they say about rollovers and separation.
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Old 01-21-2021, 03:11 PM   #10
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Who is telling you that you cannot rollover your Roth 401(k) into a Roth IRA after you leave your job? Is that info coming from the 401(k) custodian or the Roth IRA custodian?
It's the 401K custodian. They said since it was not qualified (i.e. less than 5 years old) the only way I could do it is if I do a complete roll over of my entire 401K. It seemed a bit strange to me too but I didn't question it at the time.
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Old 01-21-2021, 04:08 PM   #11
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It's the 401K custodian. They said since it was not qualified (i.e. less than 5 years old) the only way I could do it is if I do a complete roll over of my entire 401K. It seemed a bit strange to me too but I didn't question it at the time.
That makes more sense. It sounds like they are saying you have to rollover the traditional part of the 401k to an IRA at the same time as you rollover the Roth 401k to a Roth IRA. Some plans don't allow partial rollovers, and this seems like a related provision.

It throws a monkey wrench into your plans if you're relying on rule of 55 distributions though. If you rollover the entire account into two IRAs, the only part you can touch penalty free is the Roth contributions and that may not be enough.
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Old 01-21-2021, 04:44 PM   #12
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It throws a monkey wrench into your plans if you're relying on rule of 55 distributions though. If you rollover the entire account into two IRAs, the only part you can touch penalty free is the Roth contributions and that may not be enough.
Right, but no big deal, I'll be leaving everything as is, and the Roth will just continue to grow within the 401K. It's nice that distributions won't include the Roth until the non-Roth IRA money runs out (which it won't), thus avoiding any 5 year rule penalties.
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