Can I Withdraw My Entire Roth 401k Contribution After 5 Years?

One of the biggest questions anyone will ask about their financial future is exactly how a 401(k) works. At some point, this important and well-known financial program will stump most people with different rules and regulations regarding taxes, withdrawals, contributions, and more. 

This is exactly why one Redditor posting in r/personalfinance asks for a concrete answer on withdrawing specifically from the 401(k) principal. They believe you can do this once a certain amount of time has passed, but they are unsure, as they are receiving conflicting information. 

Unsurprisingly, the answers in this Reddit post vary as well, which is a testament to just how confusing some of the policies regarding 401(k) programs are. 

The Big Question

This Redditor wants to know if they deposit $10,000 in a 401(k) this year and another $20,000 next year, can they withdraw the full amount in five years? In other words, can they withdraw $30,000? The current understanding is that you can withdraw any principal after five years without a penalty. 

However, they wonder if they can only pull out $10,000 since only the full five years will have passed on that amount and then wait another year before withdrawing the $20,000. Having called Fidelity, they believe they may have been given some misinformation, especially around rolling a 401(k) over to an IRA, which would eliminate the withdrawal question.

Adding to the confusion is the original poster saying that Fidelity told them that the five-year rule applies to both 401(k) and traditional Roth IRA withdrawals. In other words, there’s a lot of confusion here, so what is the correct answer regarding withdrawals in general and the five-year rule? 

Knowing the Difference

In many ways, this Redditor would likely be better off doing a little more reading to understand the differences and nuances here for the type of 401(k) account they are concerned about. Knowing that they plan to leave their work for grad school frees them from any employee restrictions around withdrawals, but not nearly as much as the original poster might think. 

The bottom line is that you must wait until 59.5 years of age to withdraw without paying taxes. This includes contributions and earnings, which should immediately clarify the Redditor’s question. However, a traditional 401(k) would have allowed them to make a contribution withdrawal and pay the taxes upfront. 

In the case of a Roth 401(k), there is a 10% penalty if you perform an early withdrawal. In other words, if this Redditor was looking to pull out their original $10,000, they can do so, but they’ll pay $1,000 on top of this. This is known as a non-qualified withdrawal, so it has a penalty from the government to disincentivize individuals from making early withdrawals. 

The Five-Year Rule

Consider the five-year rule again to get more specific about another aspect of the Redditor’s question. Yes, the account must have been open for at least five years, but the withdrawal can only occur penalty-free if the Redditor is 59.5 years of age or older. 

The only exceptions are a disability or a first-time home purchase, neither of which occurs here. Another important fact is that the clock on withdrawals starts on January 1 of the year the contribution is made, which should help clarify some of the outstanding questions. 

Ultimately, the best-case scenario may be to try rolling the money over to a Roth IRA and then letting the five-year timer reset from when the Roth IRA was opened.