Can I Withdraw Funds Without Penalty if I Roll 401(k) Funds Into a Roth IRA?

If you follow IRS rules, there is no penalty for Roth IRA rollovers.

If you follow IRS rules, there is no penalty for Roth IRA rollovers.

Roth IRAs and 401(k) plans offer different tax breaks to help you save for your retirement years. After looking things over, you may decide a Roth is the best deal for you. You have to pay income taxes on money you roll over from a 401(k) into a Roth IRA. There’s no getting around that, but you won’t owe a penalty.

Moving 401(k) Dollars

If your company's 401(k) plan allows you to make in-service withdrawals, or you’ve moved on to another job, you may take funds out without penalty if you roll the cash over into a Roth IRA. You’ll have to pay income taxes on the rollover dollars because 401(k) money is normally pre-tax. Any money that goes into a Roth IRA must be after-tax.

Rollovers and Rules

You'll need to contact the trustee of the 401(k) plan and ask to put some or all of it in a rollover to a Roth IRA. You have 60 days from the withdrawal date to deposit the funds in a Roth. Miss the deadline by even one day and the Internal Revenue Service considers the withdrawal an early distribution. You’ll get socked with a 10 percent penalty on top of the taxes.

Uncle Sam's Cut

When you withdraw money from a 401(k), the plan trustee has to withhold 20 percent for federal income tax. You must deposit the entire amount withdrawn into the Roth IRA. Suppose you take out $10,000. You’ll get a check for $8,000, but you have to put $10,000 into the Roth account. If you don’t, what's left out is an early distribution subject to the 10 percent penalty. You must make up the $2,000 difference out of other funds like a savings account.

Do It Direct

The IRS requires 401(k) plan trustees to use a trustee-to-trustee transfer if you ask. This direct transfer has two advantages. You don’t have to worry about the 60-day deadline, and trustees don’t withhold 20 percent for taxes. Everything from the 401(k) goes straight into the Roth account. You still have to pay income taxes on the withdrawn funds, and you’ll need to come up with the cash from other sources. Any money you hold out for taxes will draw the 10 percent penalty.


About the Author

Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.

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