You must have "had the designated Roth account for 5 years and are
either disabled or over age 59 ½.."
The "penalty" is as follows:
"For example, if a nonqualified distribution of $5,000 is made from an
employee?s designated Roth account when the account consists of $9,400
of designated Roth contributions and $600 of earnings, the
distribution consists of $4,700 of designated Roth contributions (that
are not includible in the employee?s gross income) and $300 of
earnings (that are includible in the employee?s gross income)."
The explanation on this page is a little easier to understand:
"When you take a nonqualified distribution from this account, you have
to report taxable income in proportion to the account's earnings when
you take a distribution. For example, if 80% of the money in the
account is from your contributions and another 20% is from earnings,
your distribution will be 20% taxable even if the amount you withdraw
is less than the amount of your contributions."
You were right to be wary of applying logic to tax codes. You'll be
penalized every time you try it.
I would, of course, suggest consulting a financial advisor before doing anything.
Please let me know if you require any further information by posting a
request for clarification.
Request for Answer Clarification by
09 Aug 2006 19:18 PDT
Thanks for taking up my question. My question is about the 10% early
withdrawal penality - not the taxation of earnings part of the
Clarification of Answer by
10 Aug 2006 05:10 PDT
There is no tax on any part of it if you take money out after you are
59.5 years old and have had the account for at least 5 years. An
"early withdrawal" is referred to as a "nonqualified distribution".
If you take an early withdrawal you will be taxed based on the
percentage of the total amount of the account that is interest
earnings. If 20% of the account total is interest earnings then you
will have to list 20% of any early withdrawal as income and pay tax on
it. The other 80% you have already paid taxes on and you do not have
to pay tax on that again.
There is no mention of a 10% "early withdrawal penalty".
The roth ira differs from the roth 401k, in that you can withdrawal
your contributions from the account and leave the interest income in
the account before you are 59.5 and not have to pay any tax (because
you are only withdrawing the contributions that were already taxed).
With the roth 401k you are forced to draw your contributions and
interest income in proportions equal to that of the account, meaning
that you have to pay tax on some of it.
I hope that I have been able to adequately explain this. Please let
me know if you require any additional information.
Request for Answer Clarification by
10 Aug 2006 22:05 PDT
I know there is no mention about early withdrawal penality in all the
obvious places. Thats why I had to ask here :-)
Sorry, but my question is about early withdrawal penality. I would
appreciate if you could find an answer for that.
Clarification of Answer by
11 Aug 2006 06:04 PDT
You are correct. I apologize for having misunderstood your question
and answering it inaccurately. Please allow me the opportunity to
The Roth 401k accounts are first and foremost a 401k. Most of the
same rules apply, including the early withdrawal penalty on all
distribution recorded as "income".
"Withdrawing funds early incurs a 10% penalty and taxes on any potential gains"
(the key words are "potential gains")
"If the distribution is not a qualified distribution, then the
accumulated earnings will be subject to tax, and additional taxes may
("earnings" is mentioned)
The "may apply" clause is stipulated by the following:
"Exceptions. The 10% tax will not apply if distributions before age
59½ are made in any of the following circumstances:
Made to a beneficiary (or to the estate of the participant) on or
after the death of the participant.
Made because the participant has a qualifying disability.
Made as part of a series of substantially equal periodic payments
beginning after separation from service and made at least annually for
the life or life expectancy of the participant or the joint lives or
life expectancies of the participant and his or her designated
beneficiary. (The payments under this exception, except in the case of
death or disability, must continue for at least 5 years or until the
employee reaches age 59½, whichever is the longer period.)
Made to a participant after separation from service if the separation
occurred during or after the calendar year in which the participant
reached age 55.
Made to an alternate payee under a qualified domestic relations order (QDRO).
Made to a participant for medical care up to the amount allowable as a
medical expense deduction (determined without regard to whether the
participant itemizes deductions).
Timely made to reduce excess contributions.
Timely made to reduce excess employee or matching employer contributions.
Timely made to reduce excess elective deferrals.
Made because of an IRS levy on the plan., or
Made on account of certain disasters for which IRS relief has been granted."
If you do not meet any of these criteria then you are subject to tax +
additional tax (the 10%) on any early distributions that would be
So what would be considered "income"? (this is obviously the key to your answer)
"Under the proposed regulations, a nonqualified distribution is
included in the distributee?s gross income to the extent allocable to
income on the contract and excluded from gross income to the extent
allocable to investment in the contract (basis). The amount of a
distribution allocated to investment in the contract is determined by
applying to the distribution the ratio of the investment in the
contract to the designated Roth account balance. For example, if a
nonqualified distribution of $5,000 is made from an employee?s
designated Roth account when the account consists of $9,400 of
designated Roth contributions and $600 of earnings, the distribution
consists of $4,700 of designated Roth contributions (that are not
includible in the employee?s gross income) and $300 of earnings (that
are includible in the employee?s gross income)."
The key phrase is here:
"designated Roth contributions (that are not included in the
employee's goss income) and $300 of earnings (that are includible in
the employee?s gross income)."
You will pay normal tax plus the additional 10% tax on only the
earnings (interest) portion of any early withdrawal, because only that
interest portion is considered "income". With a normal 401k the
entire withdrawal is counted as "income".
Here is the form and instructions for the early withdrawal if you need them:
Thank you for your patience and allowing me another chance to answer
your question. If this is not what you are looking for please let me
Have a nice day!