When you're in a financial bind after leaving your job, cashing out a Roth account — rather than a pre-tax retirement account — can save you money in taxes and penalties. Once you've gotten the money out, the tax implications of cashing out your Roth account depends on whether your taking a distribution from a Roth IRA or a designated Roth account, such as a Roth 401(k) or Roth 403(b). However, if you're wanting to cash out your employer-sponsored Roth account because you're leaving, consider rolling it into a Roth IRA instead.
Request a total distribution from your Roth IRA or designated Roth account by completing a distribution request form from the bank at which you keep your Roth IRA or designated Roth account. The forms vary slightly from bank to bank. At the end of the year, you'll receive a Form 1099-R that shows how much you took out and the amount of contributions in the account.
Complete Form 8606 to calculate the portion of your cash out that is subject to income taxes and early withdrawal penalties. With any Roth account, the contributions come out tax-free, but the earnings are taxable and subject to the 10 percent penalty. With a Roth IRA, you get to take out all of your contributions first and only then do your earnings come out. With a designated Roth account, you have to split your distribution between earnings and contributions. However, if you're cashing out the entire balance, this distinction doesn't matter.
Report the Roth cash out on your income tax return using Form 1040. If you took the distribution from a Roth IRA, the nontaxable portion goes on line 15a and the taxable portion goes on line 15b. If the cash out came from a designated Roth account, the nontaxable portion goes on line 16a and the nontaxable portion goes on line 16b.
Complete Form 5329 to calculate the 10 percent early withdrawal penalty on your Roth cash out. Leaving your job, even if it's through no fault of your own, does not exempt you from the penalty. However, you might qualify for another exception, such as a permanent disability or medical expenses exceeding the threshold based on your adjusted gross income.
Include any federal income taxes withheld on line 62 of Form 1040. This amount is reported in box 4 of your Form 1099-R. This amount helps offset any taxes you owe as a result of your distribution.
- Internal Revenue Service: Publication 590 - Individual Retirement Arrangements (IRAs)
- Internal Revenue Service: General Distribution Rules
- Internal Revenue Service: Retirement Plans FAQs on Designated Roth Accounts
- Internal Revenue Service: Form 1099-R Instructions
- Internal Revenue Service: Form 5329 Instructions
- Internal Revenue Service: Form 1040 Instructions
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."