Raiders of the Lost Ark came out in 1981, and it’s one of the first movies I remember seeing in a theater. Harrison Ford played Indiana Jones, mild-mannered college professor by day, bullwhip-cracking archaeologist by…well, also by day, usually.
In the opening scene, Indy ventures into an ancient temple to recover the Golden Idol of Fertility. He narrowly escapes a massive rolling boulder, sliding under a collapsing stone door and grabbing his bullwhip at the last possible second.
I can’t tell you how many times I reenacted that scene, baseball-sliding under my grandparents’ garage door. Generation X is probably the reason modern garage doors now have motion sensors. You’re welcome.
But what does Indiana Jones have to do with Roth IRA withdrawal rules, Roth 401(k) withdrawals, or choosing which account to tap before age 59½?
As it turns out, avoiding IRS booby traps can be just as important as dodging rolling boulders.
Justin’s Dilemma: How to Access Roth Money Before 59½
Justin, a new client referred to me by a mutual friend, had worked for a large global corporation for 20 years. Now at the seasoned age of 49, he’s ready to start his own business. He built the financial footing he felt he needed to make the leap:
- Roth 401(k) with employer match
- Roth IRA
- A newly established business credit line
What he didn’t have? Cash for his own income needs during the startup phase.
So I did what financial planners sometimes have to do:
I went exploring, deep into the cave of IRS rules, to figure out the smartest way to access Roth money early.
Understanding Roth IRA vs Roth 401(k) Early Withdrawal Rules
Justin’s balances looked like this:
Roth IRA: $100,000
- $60,000 contributions
- $40,000 earnings
- Meets the Roth 5-year rule
Roth 401(k): $180,000
- $90,000 total contributions:
- $70K employee Roth contributions (after-tax)
- $20K employer (pre-tax: not part of the Roth account)
- $90,000 earnings growth
- $65K on employee Roth contributions
- $25K on employer pre-tax contributions
- Also meets the 5-year rule
Understanding how contributions and earnings differ across a Roth IRA and Roth 401(k) is essential because each account follows completely different withdrawal rules.
His question: “Should I withdraw from my Roth IRA or my Roth 401(k) first?”
This is where knowing the differences between Roth IRA withdrawal rules and Roth 401(k) withdrawal rules becomes critical.
Roth IRA Withdrawal Rules: Contributions Come Out Tax-Free
The Roth IRA is the hero of this story.
The IRS allows you to withdraw Roth IRA contributions at any age, tax- and penalty-free. This contributions-first ordering rule makes the Roth IRA the most flexible retirement account for early withdrawals.
Let’s apply Justin’s numbers:
- First $60,000 → completely tax-free
- Remaining $40,000 (earnings) → ordinary income tax + 10% penalty if withdrawn before 59½
This is why the Roth IRA is the “Golden Idol” in this analogy. It’s the most flexible account for early withdrawals.
Roth 401(k) Withdrawal Rules: Beware of Pro-Rata Penalties
Unlike a Roth IRA, the Roth 401(k) does not let you withdraw contributions first.
Every withdrawal is pro-rata between contributions and earnings. The pro-rata Roth 401(k) withdrawal rule often surprises people, because it creates taxes and penalties even when you attempt to access what you believe are your “after-tax” contributions.
Note: “Pro-rata” means the IRS forces withdrawals to be split proportionally between contributions and earnings and applies only to the Roth portion of the 401(k), not employer pre-tax contributions.
Justin’s Roth 401(k) Roth portion looked like this:
- 52% contributions ($70,000)
- 48% earnings ($65,000)
So, withdrawing $60,000 results in approximately:
- $31,200 contributions (tax-free)
- $28,800 earnings (taxable + 10% penalty if withdrawn before age 59½)
This makes the Roth 401(k) a far less attractive option for early withdrawals, unless it’s the only money available.
Penalty Exceptions for Early Roth Withdrawals
The IRS offers several Roth IRA penalty exceptions, but none applied to Justin.
Exceptions include: First-time homebuyer ($10,000), Higher education expenses, Medical expenses exceeding 7.5% of AGI, Health insurance during unemployment, Disability or terminal illness, Birth or adoption ($5,000), IRS levy, Qualified reservist withdrawals, Domestic abuse withdrawals, Substantially Equal Periodic Payments (SEPPs).
Always review these with a tax professional before making decisions.
The Smartest Order for Roth Withdrawals (Before Age 59½)
If Justin must access Roth money early, here’s the priority order. This “withdrawal hierarchy” applies broadly to anyone evaluating Roth IRA vs Roth 401(k) early withdrawal strategies.
- Roth IRA Contributions:
- Tax-free. Penalty-free. No strings attached. This is the bag of sand Indy uses to safely lift the idol off its pedestal.
- Roth 401(k):
- Taxable and penalized pro-rata. This is where the floor starts dropping out.
- Roth IRA Earnings:
- 100% taxable and penalized before age 59½. This is the giant boulder chasing you out of the cave.
This simple triage system could save him meaningful dollars from unnecessary taxes and penalties.
What Did I Recommend for Justin, Additionally?
Justin needed optionality and early access to Roth assets. In his case, the Roth IRA was the superior structure. But here’s where the real planning magic happens, and where Justin’s long-term flexibility came from.
The move: After separating from his employer, he rolled the Roth portion of his 401(k) into a Roth IRA, restoring contributions-first withdrawal treatment and eliminating the Roth 401(k)’s pro-rata trap. And one quick clarification here: employer contributions never go into the Roth side of a 401(k)—they always sit in the pre-tax bucket. This Roth 401(k)-to-Roth IRA rollover is one of the most effective ways to restore the Roth’s IRA contributions-first treatment and eliminate the pro-rata limitations of a workplace Roth 401(k) plan.
So of his $180,000 total plan balance, the only dollars that moved into the Roth IRA were:
- $70,000 of his own employee Roth contributions, and
- $65,000 of earnings on those contributions
The employer portion ($20,000 in pre-tax contributions plus $25,000 of earnings) rolled separately into a Traditional IRA, because employer money is always pre-tax.
Once inside the Roth IRA, Justin’s $70,000 contribution basis became accessible tax and penalty free, giving him far more flexibility than leaving the funds in the plan.
Note: “Contribution basis” refers to the portion you originally deposited, always available tax-free in a Roth IRA.
The upside?
- Regain contributions-first ordering
- Avoid pro-rata taxation on withdrawals
- Unlock tax-free access to all Roth IRA contributions
Justin wasn’t trying to solve for retirement; he was trying to survive the next year. For him, penalty-free access to Roth contributions mattered more than preserving the Roth 401(k)’s restrictive structure. That flexibility gave him the breathing room to get his business off the ground.
This was the right solution for his moment — not a universal playbook. Make sure you understand the trade-offs and speak with a tax professional before pulling a lever like this.
In summary, the Roth IRA provides far greater early-access flexibility, while the Roth 401(k) restricts withdrawals through pro-rata rules. Rolling the Roth 401(k) into a Roth IRA restores the contribution-first ordering and gives Justin tax-free access to his Roth contribution basis.
Key Takeaways: Avoid the Booby Traps
If you’re deciding between tapping a Roth IRA or Roth 401(k) early, these recommendations will guide your decision-making:
- Keep emergency cash.
- Nobody likes cash earning “nothing”, until they desperately need it.
- Not all Roth accounts are equal.
- The IRS treats Roth IRA withdrawals far more favorably than Roth 401(k) withdrawals.
- Know your contribution and earnings breakdown.
- This drives everything.
- Consult your tax professional.
- The rules are complex, and mistakes are expensive.
End Scene
Financial planning is part art, part science, part archaeology. Sometimes you’re dusting off IRS rules buried under 20 years of assumptions. Other times, you’re sprinting out of a collapsing temple with a bag of tax-free dollars in your hands.
If you find yourself needing to “Raid the Roth,” remember the Indiana Jones rule:
Take the idol carefully…or the tax traps will come for you.
This information is provided to you as a resource for informational purposes only. This information is not intended to, and should not, form a primary basis for any decision that you may make. Always consult your own tax advisor before making any tax planning considerations or decisions. The views and opinions expressed are for educational purposes only as of the date of production and may change without notice at any time based on numerous factors.
