Roth 401(k) Knowledgebase

Qualified Roth 401(k) Distributions

Qualified Roth 401(k) Distributions  The tax rules for distributions from Roth 401(k) accounts differ significantly from those of traditional pre-tax 401(k) accounts.  No income tax applies to qualified distributions from a Roth 401(k) account since taxes were paid at the time of the original contributions. 

If a distribution is a qualified Roth distribution, the entire distribution, including earnings, is tax-free.  Two conditions (both, not either/or) must be satisfied to qualify for tax-free status:

1) the plan participant must satisfy the five-year rule; and

2) there must be a qualified purpose for the distribution. 

Five-year Rule  The five-year rule is satisfied at the end of the 5-year taxable period during which the participant’s deferral is first deposited to the Roth 401(k) account.  This means that any deferral contributed within calendar year 2008, even if the first contribution date is December 31, 2008, is considered qualified as of January 1, 2011. 

Example: Roth 401(k) Five-Year Rule

Qualified Purpose Rule  A distribution from a Roth 401(k) account satisfies the qualified purpose rule only if the distribution is attributable to: 1) the participant’s attainment of age 59½, 2) the participant’s disability, or 3) the participant’s death.

Example: Roth 401(k) Qualified Purpose Rule

Example: Partial Nonqualified Roth 401(k) Distribution

There are no exceptions to these rules, such as the exception for first time home buyers that applies to Roth IRAs.  The difference between the rules for qualified Roth 401(k) distributions and qualified Roth IRA distributions are significant.

Example: Roth IRA Five-Year Rule

Example: Partial Nonqualified Roth IRA Distribution

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