Roth 401(k) plans offer the advantages of growing one’s retirement funds tax-free and qualified withdrawals can be taken at the time of retirement. Though, some portion of a withdrawal that is not-qualified will be subject to an early withdrawal penalty and to taxes. Roth 401(k) needs one to pay taxes on the investment before it is added to the account; however no taxes are paid when the money is withdrawn after complying with the five years retirement rule. So before withdrawing, determine whether you can take a distribution from your Roth 401(k) plan.
Here are the simple rules for withdrawing money from a Roth 401(k) –
- Qualified distributions can only be taken if either you are 59 ½ years old or have a permanent disability and/or the account is more than five years old.
- If you are still employed and do not have a financial hardship, then you cannot take an early distribution. There is a ten percent penalty charged by the federal government against the amount withdrawn.
- You can request for distribution from your Roth 401(k) plan by completing a withdrawal form. The document will need your account and identification information.
- Use form 1040 or form 1040A and forms 1099-R and 5329 to report the distribution on your income taxes.
- If you take a qualified distribution, then report the complete amount as an annuity withdrawal and nontaxable pension.
- If you take a non-qualified distribution, then the portion of the account must be included as taxable income, which comes from earnings.
- Calculate the early withdrawal penalty by completing the form 5329, if you take the non-qualified distribution. Once calculated, report it using form 1040 to income taxes.