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Qualified Distributions from a Roth 401K

In order for a distribution from a Roth 401K plan to be tax-free it must meet certain qualifications.  For the most part they are the same as for distributions from Roth IRAs.  Whether you are taking a distribution from a Roth IRA or a Roth 401k, to be tax-free you must be 59 1/2 or older and your first contribution must have been made at least 5 years earlier.

That difference between the IRA and the 401k is in the 5 year rule.  With a Roth IRA the 5 year clock starts ticking when you have made your first Roth IRA contribution.  Even if you open up other Roth IRA accounts in the future, they still come within the original 5 year timeframe.

 With the Roth 401k the 5 year period applies to the specific employer.  So if you start Roth 401k contributions at one employer, change jobs, and begin Roth 401k contributions with a new employer the 5 year clock is started over for the new contributions.  In order to get credit for the time at the previous employer you must rollover the Roth 401k contributions to the new employer’s plan.  If you don’t and you take a distribution from the new plan, let’s say after 3 years, the distribution will not be tax-free.

 Before taking any distributions it is always wise to seek input from a knowledgeable advisor.


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