Will a Roth 401k rolling over to a Roth IRA allow the money to become penalty-free at withdrawl?

Question

I'm aware that a Roth 401k and a Roth IRA are funded with after-tax amounts, and no taxes are incurred upon withdrawal. However, I have stumbled upon a few articles that state a 10% penalty early withdrawal is only incurred upon the earnings within the account and not the contributions. Essentially, contributions can be withdrawn penalty free in a Roth IRA account. Is it possible to set up a Roth 401k account, max it out, take advantage of employer contributions, and upon switching jobs have it roll over to a Roth IRA where, should I decide to withdraw early, incur no penalty fees?

Answer 1

Yes, it is possible. Several things to remember:

1. Penalty free withdrawal is for contributions only.
2. Employee match is going to the Traditional (non-Roth) 401k
3. Withdrawing from your retirement contributions will cripple your retirements savings significantly due to the compounding effect of the missing earnings.

Essentially, you're planning to shoot yourself in the foot, and while it is possible - it is not advised.