When Can Participants Make Tax-Free Withdrawals of Roth Assets?

Q: Our 403(b) plan allows for Roth conversion. We had a 58-year-old participant recently commence Roth deferrals and also make a Roth conversion at the exact same time. Our plan allows for in-service distributions at age 59 ½. Can our participant make a tax-free distribution at that age, or must he wait until the expiration of his five-year holding period at age 63?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

A: Roth conversions allow participants to convert money they saved pre-tax into a Roth account by paying ordinary income taxes on the converted amount in the year of the conversion. To then receive a distribution of the converted amounts and related earnings tax-free, participants must (1) attain age 59 ½ and (2) have owned the Roth account for five years. If the participant has not owned the account for five years at the time of the distribution, they will be required to pay ordinary income taxes on the earnings on such amounts. If the participant has not attained age 59 ½ at the time of the distribution (assuming they had separated from service), they will also be subject to a 10% early withdrawal penalty.

In this case, if the participant requests an in-service distribution next year, once he has attained age 59 ½ he will not be subject to the 10% early withdrawal penalty. However, they will be required to pay ordinary income taxes on any earnings that are distributed.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

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