In a previous post, we discussed the general information surrounding Designated Roth Accounts (also known as a Roth 401k) – eligibility, tax treatment, and contributions. In this post, we’ll go over the nuances involved in distributions from a Designated Roth Account under a 401k. Distributions are a little different from most other retirement plans, as you’ll see…
Required Minimum Distributions
One of the first things that is different about Roth 401k distributions is that the Required Minimum Distribution (RMD) rules DO apply to these accounts. This is different from the Roth IRA, as RMDs are not required by the original owner under present law. RMD for a Roth 401k are the same as the RMD rules for all other accounts to which the RMD rules apply.
There is, however, a way to get around the RMD rule: if you roll over your Designated Roth 401k account balance to a Roth IRA, RMDs no longer apply. Obviously, this is a tax-free event, since both accounts are non-taxable in both contributions and earnings. As long as this is done before the first year of RMD, these rolled over funds will never (under current law) be subject to RMD rules to the original owner of the account. When inherited, Roth IRA and Roth 401k funds are subject to RMDs as inherited accounts – but that’s a topic for another day.
Qualified Distributions
Another difference for the Designated Roth 401k account is in the definition of qualified distributions. As with other retirement accounts, qualified distributions can occur when one of the following events occurs:
In addition to one of those events, in order for the distribution to be qualified (and therefore tax-free), the account must have been in existence for at least 5 years.
Non-Qualified Distributions
A non-qualified distribution is, as you might guess when the rules for a qualified distribution (above) have not been met. Of course, there are complicated rules associated with any non-qualified distribution from a Designated Roth account.
