- If you take an early withdrawal from your Roth 401k plan, you have to pay income taxes on the part of the withdrawal that comes from earnings on the account. Early withdrawals from Roth 401k plans refer to those withdrawals taken before the account has been open for at least five years and before you are either 59 1/2 years old or permanently disabled. When you take the distribution, the percentage of earnings in the account is used to determine the percentage of your withdrawal that comes from earnings. For example, if two-thirds of your account is earnings, two-thirds of your early withdrawal would come from earnings and therefore be taxable.
- The IRS imposes a 10 percent early withdrawal penalty on the taxable portion of your early withdrawal unless a special exception applies. For example, if you had a $3,000 early distribution and $2,000 was taxable, you would owe a $200 penalty on top of income taxes. Exceptions that avoid the 10 percent penalty include if you use the money for medical expenses exceeding 7.5 percent of your adjusted gross income or if you retired after age 55.
- The IRS limits the amount that can be put into your Roth 401k plan each year, both by you and by your employer. If the amount of the contributions to your plan exceeds your contribution limit, you must remove it before April 15 to avoid penalties. Failing to remove the excess contributions can result in the tax-sheltered status of the Roth 401k plan being lost.
- Starting at age 70.5, you have to start taking minimum amounts out of your Roth 401k plan each year. The amount that you have to take out changes each year with your age and account value. These withdrawals are tax-free, but if you fail to take them, you have to pay a 50 percent penalty on the amount you neglected to withdraw. For example, if you don't take out $4,000 when you are supposed to, you would have to pay a $2,000 penalty.