What happens if an employee takes a distribution from his or her designated Roth account before the end of the 5-taxable-year period?
If the employee takes a distribution from his or her designated Roth account before the end of the 5-taxable-year period, it is a nonqualified distribution. The employee must include the income 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 an employee’s designated Roth account when the account consists of $9,400 of designated Roth contributions and $600 of income (earnings), the distribution consists of $4,700 of designated Roth contributions (that are not includible in the employee’s gross income) and $300 of earnings (that are includible in the employee’s gross income). See Q&As regarding Rollover
Related Questions
- How is the 5-taxable-year period calculated in the case of a rollover of a distribution from a designated Roth account maintained under a section 401(k) or 403(b) plan to a Roth IRA?
- What happens if a participant takes a loan from the Roth account and then defaults, requiring deemed distribution of the outstanding balance?
- What happens if an employee takes a distribution from his or her designated Roth account before the end of the 5-taxable-year period?
