Roth 401(k) distributions before 5 years of participation

Question of the week: Can a 72-year old client withdraw money, tax free, from a Roth 401(k) that is not yet five years old?

March 19, 2020

Q. What happens if a 72-year old client takes money from a Roth 401(k) that isn’t five-years old?

A client started making contributions to her employer’s Roth 401(k) plan in 2018 when she was 71 years old. She is considering retiring next year (in 2021). Although the Roth 401(k) would only be four years old, can she still withdraw the money in her account without tax and penalty? Wouldn’t the age 55 or age 59½ exceptions apply? If exceptions don’t apply, can she just withdraw her contributions?

A. The earnings portion of the Roth 401(k) distribution is subject to tax.

A distribution from a designated Roth 401(k) before five years are up would have tax consequences. At the same time, if your client retires, she will be subject to required minimum distributions (RMDs) from the account. Your client has some options to minimize or eliminate tax.

Qualified and nonqualified distributions from a designated Roth 401(k)

Qualified distribution rules for Roth 401(k)s are similar to the rules for Roth IRAs. That is, the distribution must be:

  1. Made after a five-taxable-year period of participation, and
  2. Made or after the date the participant reaches age 59½, or dies, or becomes disabled.

The five-year holding period begins January 1 of the year the first contribution is made and ends after five full years have elapsed. Here, the five-year period runs from 2018 through 2022. The earnings on any distribution made before 2023 are subject to income tax and penalty unless a penalty exception applies.

The ordering rule that applies to Roth IRA distributions does not apply to non-qualified Roth 401(k) distributions. Instead, the distribution is treated as consisting of basis and earnings. Basis in the distribution is determined by multiplying the withdrawal by the ratio of contributions to the entire Roth 401(k) balance. For example, say that your client contributed $15,000 to the account and the account balance is $16,000. If she withdraws $2,000, basis in the withdrawal would be $1,875 [$2,000 × ($15,000/$16,000)]. Taxable earnings would therefore be $125 ($2,000 - $1,875).

Because your client is over 59½, the 10% penalty does not apply. Note that the two age exceptions (age 59½ and age 55) are exceptions to the 10% penalty, not to the income tax on earnings.


The requirement to take minimum distributions from the account apply to designated Roth 401(k)s as they do to tax-deferred 401(k)s. Taxpayers who turn age 70½ (or age 72 if born after June 30, 1949) must begin RMDs. Taxpayers who are still working for the sponsoring employer may postpone the required beginning date to April 1 of the year after they retire.

If your client retires in 2023 or retires in 2022 but waits until 2023 to withdraw at least her RMD from the account, there will be no tax consequences. Otherwise, here are some options for her:

Roth 401(k) distribution options and their impacts

  • Retire in 2021 as planned and withdraw the entire account balance. The earnings portion of the distribution will be taxed at her marginal tax rate.
  • Retire in 2021 as planned and withdraw only her RMD. The earnings portion of the distribution will be taxed but the withdrawal and taxable earnings will be smaller.
  • Retire in 2021 as planned but wait until 2022 to take the entire account balance or just her RMD. The tax consequences would be the same as the first two because the five-year holding period is not completed until January 1, 2023.
  • Rollover the Roth 401(k) balance to an existing Roth IRA. The amount of time that funds were in the Roth 401(k) do not count toward the Roth IRA’s five-year holding period. If your client rolls over the Roth 401(k) balance to a Roth IRA that is at least five years old, any distribution made after the rollover is completed is a qualified Roth IRA distribution.
  • Rollover the Roth 401(k) balance to a new Roth IRA. Your client can open a Roth IRA if she doesn’t already have one and rollover the Roth 401(k) balance to the new Roth IRA. The advantage to this action, especially if she changes her mind about withdrawing funds, is that the Roth IRA is not subject to RMDs. The disadvantage is that a brand-new holding period would apply and your client would have to wait five years before she can take qualified distributions from the new Roth IRA.

For more information on designated Roth 401(k) accounts, see:

Retirement Plans FAQs on Designated Roth Accounts

Pub. 4530, Designated Roth Accounts (note, the publication is not yet updated to show the age 72 required beginning date).

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