Hardship Withdrawal from Roth deferral account

[Pammie57]

We have a participant who has only been contributing to his Roth 401k account for 2 years. He does have a bona fide hardship (medical expenses substantiated with receipts).

He has $1950 in contributions and $50 in earnings. Even if he is limited to his $1950 - is he taxed on this distribution since it's only been in 2 years, as opposed to 5 years?

I read something about allocating a portion of the ROTH distribution to earnings, and that amount would be taxable, even if earnings are not actually distributed.. I am a little confused on what, if any, is taxable.

[Lou S.]

My understanding is you are limited to the $1,950.

However you must prorate the distribution between basis and earnings unlike an IRA where the basis is recovered first.

I get $1,901.25 would be non-taxable return of basis and $48.75 would be subject to taxation and penalties in your example.

And hopefully you have a good record keeping system to track the basis when he takes the rest out later.