Eventually, your years of hard work will pay off. You’ll be able to toss out the alarm clock and spend your days doing whatever you want. But you’ll at least need enough money to live comfortably. If you plan it right, you’ll even have enough to travel or pursue other pricey hobbies. But if you have retirement savings accounts, there are restrictions on when you can access those funds. For Roth 401(k) accounts, there’s not only a minimum age, but a minimum amount of time the funds will need to have been in the account before you can begin taking distributions. It’s important to be aware of those rules well in advance so that you can make sure you’re fully prepared when you retire.

What is a Roth 401(k)?

A Roth 401(k) combines elements of a Traditional 401(k) with elements of a Roth IRA. Like a Traditional 401(k), a Roth 401(k) is an employer-sponsored plan, but a Roth 401(k) withdrawal is similar to a Roth IRAs, in that you will owe no taxes on the money at retirement since you put the money in after taxes had already been taken out.

Due to the tax treatment, there are Roth 401(k) rules that are different than what you’d have with a Traditional 401(k). There are also some rules that are the same. You’ll have an annual contribution limit with either type of 401(k). For 2021, that limit is $19,500. The employees who typically opt for a Roth 401(k) want to enjoy tax-free withdrawals at retirement.

Roth 401(k) Withdrawal Rules

The most important of the Roth 401(k) withdrawal rules is the minimum age for distributions. You’ll need to be at least 59½ years of age to start taking distributions without penalty. However, there are some exceptions to this.

You can take a Roth 401(k) early withdrawal, provided you’re retiring early from the employer that sponsored the plan. In other words, you can’t take an early withdrawal on an account with a previous employer. This exception, called the 401(k) 55 rule, allows you to start taking funds from your Traditional or Roth 401(k) without penalty.

What if you violate the minimum age for distributions? You’ll pay a 10 percent penalty on the funds you withdraw. But it gets worse. You’ll also be required to pay taxes on the income you’ve made while the funds were in the account.

But there is one more exception to the minimum distribution age. If you become disabled, you can qualify to withdraw the funds early without penalties or taxes. This also applies if you die before reaching retirement age. The funds would go to your beneficiaries, penalty and tax free.

Although you don’t have to take the money out at the age of 59½, you do have to take it out before you reach the age of 72. This is known as the required minimum distribution (RMD) rule. Failure to take the money out in time will result in steep penalties.

One last rule that applies to Roth 401(k)s is what’s known as the five-year rule. The Roth 401(k) 5 year rule simply stipulates that you can’t take the money out, tax-free, unless it’s been in the account for five years.

Taxes on Unqualified Withdrawals

Now that you’ve established that the Roth 401(k) early withdrawal penalty is 10 percent, it’s important to take a close look at the taxes you’ll pay. If you take the money out early without meeting the qualification of being disabled, it’s known as an “unqualified distribution.” Under Roth 401(k) distribution rules, unqualified distributions are taxed.

But you won’t be taxed on the full amount you took out. You already paid taxes on the money you put in, after all. You’ll be taxed on any income you made on the money in the account. If you wait until the age of 59½, the original investment plus any growth will be tax free.

Rolling Over Funds in a Roth 401(k)

If you don’t think you’ll withdraw the funds by the age of 72, there’s a way to avoid the Roth 401(k) withdrawal penalty. You can roll the funds into a Roth IRA. This is due to the fact that a Roth IRA has the same tax treatment as a Roth 401(k).

There’s one caveat associated with rolling your Roth 401(k) over. In addition to the Roth 401(k) withdrawal age is the rule that you have to leave the money in for five years before taking it out. When you roll the money into a Roth IRA, the clock resets. That means you’ll have to wait another five years before you can start taking distributions.

Borrowing from a Roth 401(k)

If you need the money before you reach the minimum age, a Roth 401(k) loan is an option. You’ll need to follow the rules of your specific plan, but typically you can take a loan of up to $10,000 or 50 percent of the account balance, whichever is greater, with a maximum of $50,000.

To avoid being taxed on the loan funds, you’ll need to repay them within five years. You’ll need to make payments at least quarterly, and any interest will go into your account, so you’ll be repaying yourself.

Final Thoughts

A Roth 401(k) can be a great way to set money aside for retirement while also reducing your taxable income. If you plan to take the money out early, though, make sure you use a Roth 401(k) early withdrawal calculator to see how much you’ll owe. We recommend consulting a Certified Financial Planner® to ensure you’re saving enough to cover your living expenses after retirement.

Questions about your Roth 401(k)?

We're here to help make sense of it all.

Talk with a planning professional at Retirable →