Simple Roth 401K Question

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Earnings on investments within a Roth IRA are neither subject to income tax nor are they included in the IRA owner's income. Instead, they accumulate on a tax-deferred basis and are tax free when withdrawn from the Roth if the distribution is qualified.

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Tax Treatment Of Roth IRA Distributions
By Denise Appleby A A A
The Taxpayer Relief Act of 1997 created the Roth IRA, which was made effective for tax years beginning 1998. Prior to 1998, individuals who wanted to fund an IRA could make either a deductible or nondeductible contribution to a Traditional IRA, but distributions from Traditional IRAs are generally treated as ordinary income and may be subject to income tax as well as an additional early-distribution penalty if the withdrawal occurs while the IRA owner is under the age of 59.5. The Roth IRA, on the other hand, allows qualified distributions to be free from tax and penalties. Here we review the tax treatment of Roth IRA distributions. (For background reading, see Are all my Roth IRA distributions tax free?)

Tutorial: Roth IRAs

Defining Qualified Distribution
Distributions from a Roth IRA that are not qualified may be subject to income tax and an additional 10% early-distribution penalty. A qualified distribution meets both of the following two categories of requirements:

1. It occurs at least five years after the Roth IRA owner established and funded his or her first Roth IRA*.

2. It is distributed under one of the following circumstances:

The Roth IRA holder is at least age 59.5 when the distribution occurs.
The Roth IRA holder becomes disabled before the distribution.
The beneficiary of the Roth IRA holder receives the assets after his or her death.
The distributed assets will be used toward the purchase or rebuilding of a first home for the Roth IRA holder or a qualified family member. This is limited to $10,000 per lifetime. Qualified family members include the following:
the Roth IRA holder
the Roth IRA holder's spouse
the children of the Roth IRA holder and/or his or her spouse
the grandchild of the Roth IRA holder and/or his or her spouse
the parent or other ancestor of the Roth IRA holder and/or his or her spouse\

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