Tax Consequences

Under IRS rules, distributions are subject to taxes and penalties depending on the participant’s age and type of contribution account, as described below:

Note: These are general tax guidelines. Participants should always be directed to seek tax advice from their legal or tax advisor.

Type of DistributionSubject to Ordinary Income TaxSubject to Penalty Tax for Early PaymentEligible for Rollover
After-tax employee contributionsOnly the earningsOnly the earningsYes*
Roth 401(k) contributionsOnly the earnings, except for a “qualified” distributionOnly if taxableYes
All other contributionsYesYesYes

* The Program will need specific instructions to include after-tax contributions in a rollover distribution, if applicable.

Withdrawals from Roth 401(k) Contributions

Please note that special tax consequences apply to withdrawals from Roth 401(k) contributions. The taxation of a hardship withdrawal from Roth 401(k) contributions depends on whether the withdrawal is a qualified distribution. “Qualified” distributions from Roth accounts are fully excludable from gross income. To be qualified, the distribution must be made after:

  • The participant has reached age 59½, become disabled or died, and
  • The Roth account has been maintained for at least five years.

In all other cases, the distribution is nonqualified. Nonqualified distributions are treated partly as a tax-free return of contributions and partly as receipt of taxable investment earnings.

Avoiding a Tax Penalty on Distributions

The participant can avoid paying current withholding taxes and penalties by leaving his or her money in the plan or by requesting a direct rollover to:

  • An individual retirement account (IRA), or
  • An eligible employer-sponsored retirement plan.

These are general tax guidelines. Participants should always be directed to seek tax advice from their legal or tax advisor.