Plan allows in-service withdrawals after age 59-1/2 from any (all) fully vested accounts.
Active participant is over 59 1/2 with 401(k), Roth and match balances in her account. Her Roth contributions started in January of 2014 so she has not yet met the 5-year rule. She has made ~$21,700 in Roth contributions and the earnings on that are ~$8,178. She would like to take $20,000 from her Roth account only. The participant basically wants to "net" $20k.
It's my understanding from reviewing the regs that a pro rata portion of the withdrawal will be considered earnings and will be taxable to her because she has not met the 5-year rule. (I came up with the "earnings ratio" and based on that it appears that ~$5,474 of her withdrawal will be taxable to her.) I understand the 10% excise will not apply, however because she is over 59 1/2.
The plan is with a large 401(k) vendor and I'm
checking with them to see how they would apply taxation as well as how they do the calculation.
In the meantime, anyone agree or disagree with my thought process on the calculation?
The following is from the IRS website:
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. The basis portion of the distribution is determined by multiplying the amount of the nonqualified distribution by the ratio of designated Roth contributions to the total designated Roth account balance.
For example, if a nonqualified distribution of $5,000 is made from your 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 your gross income) and $300 of earnings (that are includible in your gross income).
Since I make designated Roth contributions from after-tax income, can I make tax-free withdrawals from my designated Roth account at any time?
No, the same restrictions on withdrawals that apply to pre-tax elective contributions also apply to designated Roth contributions. If your plan permits distributions from accounts because of hardship, you may choose to receive a hardship distribution from your designated Roth account. The hardship distribution will consist of a pro-rata share of earnings and basis and the
earnings portion will be included in gross income unless you have had the designated Roth account for 5 years and are either disabled or over age 59-1/2.