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I am leaving my current job. Can I do a rollover from my existing Roth 401k, to a Roth IRA, and then withdraw my contributions and vested employer contributions from this year and stick them into a savings account without penalties?

Extra context for those who are curious: I live in a major metropolitan area and have received an excellent job offer in a rural area with a low cost of living. That being said, I just bought a place last year in a great neighborhood in the metro area for dirt cheap (Mortgage + PITI + HOA fees + Utils are around $750/mo). I have a private buyer lined up and can at least recover the money I put in, but would like to hold on to it as a vacation and possibly rental property. But over the past year, in addition to buying this place I also bought a car and remodeled the bathroom, so my cash reserves are much lighter than I feel they should be. So I'm looking for creative ways to beef up my savings account without selling, hence rolling over to Roth IRA and trying to get my contributions back.

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According to IRS Pub 4530, there are two (potential) problems with doing what you suggest.

First, the employer contribution is pre-tax, and is treated just like a normal 401(k) contribution.

Second, unless you meet the usual criteria for distribution (age or disability), some of the distribution would be subject to income tax. That would be the case if the value of the account exceeds the elected contribution amount. For example, if the account is worth 25% more than the contributed amount, the basis of the withdrawal would be 1/1.25 = 0.80 (or 80%) of the amount, and hence you'd pay income tax on 20% of the distribution.

Edited to add:

It would seem that the second problem above is only applicable for non-qualified direct distributions from the 401(k). After a little more research, I found an IRS FAQ on Designated Roth Account Rollovers. It appears from example 1 in the linked section that you can do what you propose, as long what you withhold from the rollover is less than the amount of the designated contribution. (It's an interesting loophole that contributions to the Roth 401(k) are irrevocable until you roll them over to a Roth IRA, at which point you're subject to the more lenient IRA rules.)

Not usually a good idea to touch retirement funds. Just pay your savings account from your new paychecks for a while to rebuild your cash cushion.

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  • I get your first point. I did not know that employer contributions are pre-tax, so thank you. On the 2nd point though, I'm more wondering if this is technically considered a distribution. I know that Roth IRA distributions are subject to penalties/taxes if you don't meet the criteria, but I'm wondering if it is possible to have the contributions I've made to my Roth 401k pulled out as a withdrawal (not disbursement) once my rollover to a new Roth IRA is complete.
    – Dave
    Aug 30, 2013 at 18:44
  • @Dave - Corrected the answer with more info from the IRS. Maybe you can do what you propose. I still don't think it's a great idea to touch retirement funds, as long as your income allows you to meet expenses and rebuild your cash. Also, I am not a tax pro--just going by my reading of the IRS pubs.
    – Rick Goldstein
    Aug 30, 2013 at 19:38

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