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taxes roth-ira contribution withdrawal roth-401k

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March 4, 2025 Score: 9 Rep: 194,037 Quality: Expert Completeness: 50%

Roth IRAs are governed by the IRC Sec. 408A, and Roth 401k are goverened by the IRC Sec. 402A.

Distributions from Roth IRAs are governed by 26 USC Sec. 408A(d). Distributions from Roth 401k are governed by 26 USC Sec. 402A(d).

Specifically, we're looking for ordering and aggregation rules - 402A(d)(4) and 408A(d)(4).

408A(d)(4)(B) has this:

(B) Ordering rules For purposes of applying this section and section 72 to any distribution from a Roth IRA, such distribution shall be treated as made— (i) from contributions to the extent that the amount of such distribution, when added to all previous distributions from the Roth IRA, does not exceed the aggregate contributions to the Roth IRA; and

This is the part that allocates distributions first to the contributions and only then to earnings for Roth IRAs.

However in 402A(d)(4) we only have this:

(4) Aggregation rules

Section 72 shall be applied separately with respect to distributions and payments from a designated Roth account and other distributions and payments from the plan.

Ooopsie. No ordering rules. Thus, a distribution includes all the components of the plan prorated.

Whether this was intended, or Senator Roth was sloppy - I'm not sure. But the ordering rule is only included in the Roth IRA program.

There are some other subtle differences between the IRA and 401k versions. For example 401k has a more restrictive definition for "qualified distributions" (removing "qualified special purpose distribution" available for IRAs). So it may have been intentional, wouldn't put it past Mr. Roth. He was, after all, the last Delaware Republican elected to Senate ever (his successor was a Democrat, and his co-Senator was Joe Biden, also a Democrat).

March 4, 2025 Score: 3 Rep: 17,764 Quality: Medium Completeness: 50%

I believe you are correct, and they are that different.

However, you can get around it by rolling over from Roth 401(k) to Roth IRA, in which case the contributions from Roth 401(k) become contributions in Roth IRA, and earnings from Roth 401(k) become earnings in Roth IRA, for the purposes of Roth IRA distribution ordering rules. This would allow you to immediately withdraw only contributions from the Roth IRA. See 26 CFR 1.408A-10 Q-3:

Q-3. For purposes of the ordering rules on distributions from Roth IRAs, what portion of a distribution from a rollover contribution from a designated Roth account is treated as contributions?

A-3.

(a) Under section 408A(d)(4), distributions from Roth IRAs are deemed to consist first of regular contributions, then of conversion contributions, and finally, of earnings. For purposes of section 408A(d)(4), the amount of a rollover contribution that is treated as a regular contribution is the portion of the distribution that is treated as investment in the contract under A-6 of § 1.402A-1, and the remainder of the rollover contribution is treated as earnings. [...]

Furthermore, it seems you wouldn't even need the contributions to temporarily go through the Roth IRA. If you get a distribution from Roth 401(k) and roll over only part of it to Roth IRA, the portion that is rolled over will come from earnings as much as possible, meaning that the part you keep (that wasn't rolled over) will come first from contributions. See 26 CFR 1.402A-1 Q-5 (b) and (d):

Q-5. How do the taxation rules apply to a distribution from a designated Roth account that is rolled over?

A-5.

(b) In the case of an eligible rollover distribution from a designated Roth account that is not a qualified distribution and not paid as a direct rollover contribution, if less than the entire amount of the distribution is rolled over, the part that is rolled over is deemed to consist first of the portion of the distribution that is attributable to income under section 72(e)(8).

(d) The following example illustrates the application of this A-5:

Example.

Employee B receives a $14,000 eligible rollover distribution that is not a qualified distribution from B's designated Roth account, consisting of $11,000 of investment in the contract and $3,000 of income. Within 60 days of receipt, Employee B rolls over $7,000 of the distribution into a Roth IRA. The $7,000 is deemed to consist of $3,000 of income and $4,000 of investment in the contract. Because the only portion of the distribution that could be includible in gross income (the income) is rolled over, none of the distribution is includible in Employee B's gross income.