Roth retirement plans offer the ability to grow your wealth tax-free and are a powerful tool to get your retirement plan on track. But, can you withdraw your Roth 401k contributions like a Roth IRA?
Unfortunately, the answer is no. With a Roth IRA, you can withdraw your contributions at any time without penalty. However, you can only withdraw your Roth 401k contributions and avoid penalties on those withdrawals after you reach age 59 1/2 or have been disabled for at least six months. Additionally, if you withdraw your Roth contributions before reaching age 59 1/2, the withdrawal may be taxable and you may be subject to a 10% early withdrawal penalty.
While you can’t withdraw your Roth 401k contributions early like you can with a Roth IRA, there are still incredible benefits to having and growing your Roth 401k.
Roth retirement funds are designed to grow tax-free. If you sell an asset at a profit in your Roth 401k, you don’t pay capital gains taxes on the profits. Additionally, any investment income earned in the Roth 401k grows tax-free, and can later be distributed tax-free as well.
Defining Roth 401k Contributions
Without getting too complicated – there are two types of contributions in a Solo 401k plan:
- Employee salary deferrals: Can be up to 100% of your compensation, maxing out at $20,500. Can be pre-tax or Roth
- Employer profit-sharing contributions: 20-25% of net profits, depending on your business structure. Pre-tax only
The total amount you can contribute per person for 2022 is $61,000 or $67,500 if you are age 50 or older. You can contribute $66,000 total in 2023, or $73,500 if you are age 50 or older.
Roth 401k contributions are employee salary deferral contributions. Employer profit-sharing contributions cannot be Roth, though there is a proposed legislation to change this.
Employee salary deferral Roth 401k contributions have special rules. The rules define whether a withdrawal from your Roth 401k contributions is qualified (tax-free) or unqualified (taxable).
Withdraw Your Roth 401k Contributions Tax-Free
Qualified Roth 401k withdrawals mean you can take the money out of the Roth 401k tax-free. Unqualified Roth 401k withdrawals mean any funds you remove from the Roth 401k are subject to taxation, and potentially 10% early withdrawal penalties.
Roth contributions are “after-tax”, meaning they are not tax deductible when you put the money in. Because you didn’t take a tax deduction when making the contribution, the IRS later allows you to withdraw those funds tax-free. But only if you meet certain qualifications.
Roth 401k distributions have certain conditions attached to them, and one of those is the requirement of a triggering event. Remember, because the IRS is allowing you to withdraw those funds tax-free, they have certain requirements before you get access to those funds.
Triggering event needed to withdraw your Roth 401k contributions
A triggering event is defined as:
- Reaching retirement age, as defined by the plan (usually 59.5 as a minimum)
- Terminating from service with the employer that sponsors the plan (no longer working for that employer) or severance from employment
- Termination of the 401k plan
- Death of the participant, in which case the beneficiaries would make withdrawals
- Disability of the participant. Disability would generally be defined under the plan document
With a Solo 401k plan, you have to reach age 59.5 or shut down your business and Solo 401k plan, in order to withdraw your Roth 401k contributions tax-free.
The government designed 401ks to be employee benefit plans, meant to protect workers in their golden years. Therefore, they don’t want you to be able to easily access the tax-free funds too early. The IRS believes that to prevent misappropriation and misuse of Roth 401ks, it is important your Roth 401k funds cannot be easily accessed. That’s why a triggering event is necessary.
In other words, you cannot withdraw your Roth 401k contributions at any time, like you can with Roth IRA contributions.
Withdrawing your Roth 401k contributions is different than withdrawing growth on your Roth 401k funds
While it’s true you must have a triggering event to withdraw your Roth 401k contributions, there’s an extra requirement if you want to withdraw the growth on your Roth 401k contributions. In addition to being retirement age (usually 59.5), the IRS also requires your Roth 401k funds have been in the Roth 401k account for 5+ years.
Therefore, if you meet a triggering event as defined above, you can withdraw your Roth 401k contributions. But, if you want to withdraw the growth on those funds, you have to be both:
- Age 59.5
- Have funds in the Roth 401k for 5+ years
If you are age 59.5 and the funds have been in the Roth 401k account for under 5 years, the withdrawal is taxable. If the funds have been in the account for 5 years, and you take a withdrawal before age 59.5, the withdrawal is taxable.
If you are age 59.5 and the funds have been in the account for 5+ years, the withdrawal is tax-free.
Withdraw your Roth IRA contributions any time
Even though there are limits on when you can withdraw your Roth 401k contributions, those same limitations don’t typically apply to a Roth IRA. You can withdraw Roth IRA contributions at any time, allowing you to access your money at any time without paying taxes or penalties.
When can I rollover Roth 401k funds to a Roth IRA?
When you rollover your Roth 401k funds to a Roth IRA, the IRS views this as withdrawing your Roth 401k contributions. Therefore, the same triggering events are required.
You can rollover Roth 401k funds to your Roth IRA is when you reach age 59.5, terminate employment in the business, or if the 401k plan is terminated.
Need access to your funds? Consider a loan from your Roth 401k.
If you need access to the cash in your Roth 401k, you might want to take a loan from your 401k plan. A 401k participant loan allows you to borrow money from your own 401k accounts.
You can borrow 50% of your vested account value, or $50,000 (whichever is less). You have up to 5 years to pay the participant loan back, and any interest earned on the loan goes right back into your Roth 401k where it can continue to grow tax-free.
Secure Act 2.0 Eliminated Roth 401k RMDs
Previously, you had to begin withdrawing your Roth 401k funds at age 72. These are known as Required Minimum Distributions, and used to apply even to Roth 401k funds.
The passing of Secure Act 2.0 eliminated Required Minimum Distributions from a Roth 401k. No more RMDs on Roth 401k funds means your money can continue to grow tax-free for longer.
Additionally, because there’s no required minimum distribution, your beneficiaries will also be able to take advantage of this tax-free growth after you pass away.
Ultimately, there’s an incredible value to growing your Roth 401k funds and continuing to make Roth 401k contributions in your Solo 401k. You can grow the Roth 401k assets tax-free, and later make qualified withdrawals that are tax-free as well.
Keep in mind that if you withdraw your Roth 401k contributions early (before age 59.5), those withdrawals will be taxable. Make a plan that allows you to keep the funds in the Roth 401k until you reach retirement age and the funds have “seasoned” for at least 5 years. If you need access to the cash in your Roth 401k early, consider a participant loan.