Roth 401k non qualified distribution penalty

[WCC]

This topic was discussed briefly on another thread with a conclusion that concerned me.

Is a non qualified Roth 401(k) cash distribution subject to the 10% early withdrawal penalty? Not just the earnings, but the entire distribution?

I have always thought it was and would be shocked if both the basis and the earnings are not subject to 10%. However, the below paragraph from the IRS site is confusing me. I have also read material that suggests the basis of a non qualified Roth 401(k) distribution is not subject to the early withdrawal penalty.

"Topic 558 - Additional Tax on Early Distributions from Retirement Plans, Other Than IRAs

To discourage the use of retirement funds for purposes other than normal retirement, the law imposes a 10% additional tax on certain early distributions from certain retirement plans. The additional tax is equal to 10% of the portion of the distribution that is includible in income. .....

Any clarification would be great as I cannot find a direct statement that says the Roth 401k basis is not subject to the 10% penalty in a non qualified distribution.

[Lou S.]

The Roth basis is non-taxable and thus not includable income, why on earth would it be subject to the additional 10% penalty?

[GMK]

from:

http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-on-Designated-Roth-Accounts#distns

What happens if I take a distribution from my designated Roth account before the end of the 5-taxable-year period?

If you take a distribution from your designated Roth account before the end of the 5-taxable-year period, it is a nonqualified distribution. You must include the earnings portion of the nonqualified distribution in gross income. However, the basis (or contributions) portion of the nonqualified distribution is not included in gross income.

[WCC]

_{Thanks Lou. That is why I am confused on this and asked the question. Why on earth would anyone contribute on a pretax basis if you could immediately avoid the 10% penalty with Roth contributions (I know the potenatial pros to pretax and don't expect an answer). There is a lot of leakage in plans and I don't encourgae employees to take early distributions. But leakage happens and if there is no 10% penatly on the basis of non qualified Roth distributions it wold seem to "encourage" leakage when compared to pre tax deferrals.}