A Roth 401(k) requires after-tax contributions. Because you make deposits to the account after income tax is assessed, your withdrawals are generally tax-free. Taxes are assessed if you do not follow Internal Revenue Service rules for taking distributions, including the completion of a minimum holding period.
A few events cause Roth 401(k) distributions to be taxed and assessed a penalty. For example, you must leave the account untouched for five years. You must also be at least 59 1/2 years old or disabled to make tax-free withdrawals.
If you work for more than one employer offering a Roth 401(k), you may choose to open an account with each. The five-year holding period starts on the date you established the separate accounts. For example, you might have a Roth 401(k) that matures this year and another that you shouldn't touch for another three years.
You may roll your Roth 401(k) funds over to another Roth 401(k). If you use one of two methods, you'll avoid taxes and early withdrawal penalties. Request a direct rollover in which the current financial institution holding the account transfers the money directly to the new one. You can also ask for a check and deposit it in a rollover account within 60 days of receiving it. If you do a direct rollover, there is no interruption to the holding-period counter: The date you opened the original account remains the start of the five-year period. If you opt for the 60-day rollover, the clock starts over when you open the new account.
Consult a tax accountant if you feel you need to tap into your Roth 401(k) before the five years are up. She can calculate the financial consequences and help you compare the pros and cons of an early withdrawal. In general, expect to pay income taxes on any earnings you take out and a 10 percent penalty for getting the money before the account matures.
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