Mega Backdoor Roth - 401k vs IRA with Fidelity

[shieldsoldier10]

Hi All,

BACKGROUND - My wife's plan allows for after-tax contributions and automatic in-service conversions, but only after she has maxed her $19.5 individual contribution limit. She just hit the limit last month and now Fidelity is showing a new source of "Roth In Plan Conversion" I believe I could be done here, I've successfully started the Mega Backdoor Roth process and will monitor for the rest of the year to make sure we don't go over the $57K limit (although I wonder if Fidelity would just stop taking contributions if we hit the max).

QUESTION - I'd like to be as flexible as possible for FIRE in about 15 years, including having Roth contributions to withdraw from to bridge the gap between retirement and 59.5. From what I understand, if I leave this plan alone and my wife doesn't move jobs, we'll have Roth 401k funds under which the contributions should be accessible before we are 59.5. HOWEVER, early withdrawals from Roth 401k's are pro-rated between contributions and earnings and the earnings would be subject to the 10% withdrawal penalties. Is that accurate? And if so, is there anyway to rollover the Roth 401k to a Roth IRA? Online when I tried to initiate a roll-over it seemed like I could only select a specific $ to roll, not from a specific source (like a previous rollover, or just the Roth 401k). And would I have to do this consistently, or maybe just the 5 years before retirement so the funds could season in a Roth IRA? Anything else I'm not thinking of?

We've called Fidelity twice when we started this plan, the first time, we got someone who knew exactly what we were talking about and was very helpful, but the second call went to someone who had never heard of a Mega Backdoor Roth and was a little useless. Rather than just spinning the wheel again, I thought I'd ask a group that may have had a similar situation first.

Thank you!

[pasadenafr]

Do not get confused between Roth 401(k) contributions and Roth conversions. The megabackdoor is a conversion.

Whether or not you can rollover (not withdraw) those converted funds to an external Roth IRA depends on your wife's plan - so she should check her plan's SPD (Summary Plan Description) to see if those are allowed in-service.

If you leave the converted money in the plan, you can roll it over to a Roth IRA at any time if the plan allows for in-service rollovers to a Roth IRA, or upon employment termination. Then the typical 5-years rules apply. So basically if you can rollover, you don't have to, and it's mostly a choice between the funds available in the plan vs those available in your Roth IRA.

AFAIK, Fidelity doesn't let you do it. I have to call them in order to do the rollover - I normally do it once a year, after I max it out. I strongly recommend rolling over to a Fidelity Roth IRA as this is a lot faster and doesn't require them to send you a check. It's done in a few minutes and takes a couple of days to settle. Note- not all the reps know the terminology "Mega Backdoor" so be sure to tell them exactly what you want to roll over (the after-tax contributions converted to Roth) and where.

Is the automatic in-service conversion in your wife's plan daily or quarterly? That could have an impact on how best to do it, and how often.

[terran]

Yes, withdrawals from Roth 401(k) are split proportionally, but once you roll the Roth 401(k) over to Roth IRA it's just like if you made the original transaction in an IRA in the first place, so contributions come out first, then conversions, then gains. Even if the plan would let you make in-service withdrawals to Roth IRA I'd probably just stick with the in-plan conversions as it sounds like those can be set up to happen automatically in the plan, which is nice instead of having to call in every month to make a withdrawal.

[shieldsoldier10]

Do not get confused between Roth 401(k) contributions and Roth conversions. The megabackdoor is a conversion.

But the conversions would still be subject to the same proration if we wanted to access the funds when we retire at 50, and therefore we'd have the 10% penalty on the earnings portion, right?

Is the automatic in-service conversion in your wife's plan daily or quarterly? That could have an impact on how best to do it, and how often.

The in-service conversion is daily. Maybe it would make the most sense to call Fidelity at the end of the year and roll-over the "Roth In-Plan Conversion" amounts to a Fidelity Roth IRA, if they allow it (I agree that sticking with the same firm would make it much simpler). That way I would start the 5 year clock with each year we contribute to this plan? But would I have to document the conversions vs. the earnings each year to keep the buckets separate for eventual early withdrawal? If so, then maybe it would be better to just keep it in the Roth 401k and either accept the penalty or try to bridge retirement to 59.5 solely with our taxable account.

Thanks again!

[pasadenafr]

Do not get confused between Roth 401(k) contributions and Roth conversions. The megabackdoor is a conversion.

But the conversions would still be subject to the same proration if we wanted to access the funds when we retire at 50, and therefore we'd have the 10% penalty on the earnings portion, right?

Is the automatic in-service conversion in your wife's plan daily or quarterly? That could have an impact on how best to do it, and how often.

The in-service conversion is daily. Maybe it would make the most sense to call Fidelity at the end of the year and roll-over the "Roth In-Plan Conversion" amounts to a Fidelity Roth IRA, if they allow it (I agree that sticking with the same firm would make it much simpler). That way I would start the 5 year clock with each year we contribute to this plan? But would I have to document the conversions vs. the earnings each year to keep the buckets separate for eventual early withdrawal? If so, then maybe it would be better to just keep it in the Roth 401k and either accept the penalty or try to bridge retirement to 59.5 solely with our taxable account.

Thanks again!

Again, you can rollover to a Roth IRA before withdrawing anything. Before 50, you can't access the earnings, but it's not pro-rated - you get the conversion first, then the earnings.

If any tax or penalty is assessed, it'll be on the portion of the conversion that was taxable when you made the conversion. With a daily auto-conversion, that would be exactly $0.

(Others may correct me if I'm wrong but that's how I understand it).

Since my company switched to daily conversions, I max it out before rolling over to my Roth IRA at the end of the year. But the main reason is that I like having my eggs in the right basket. A lot of people I know just leave it in the 401(k) until they retire.

[Visitation]

Keep in mind the 5 year rule, which states that on a conversion, you have to wait 5 years before you can access your principle with out penalty.  There is a five year rule for every conversion.

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[terran]

Keep in mind the 5 year rule, which states that on a conversion, you have to wait 5 years before you can access your principle with out penalty.  There is a five year rule for every conversion.

This is only on the taxable portion of the conversion. The non-taxable portion can be withdrawn immediately. The taxable portion comes out first, but it's likely to be minimal, especially with automatic conversions.

[Visitation]

Keep in mind the 5 year rule, which states that on a conversion, you have to wait 5 years before you can access your principle with out penalty.  There is a five year rule for every conversion.

This is only on the taxable portion of the conversion. The non-taxable portion can be withdrawn immediately. The taxable portion comes out first, but it's likely to be minimal, especially with automatic conversions.

Are you positive?  If these are truely conversions, there is a five year waiting period on withdrawls of contributions before their penalty free.  If these are direct contributions to a Roth, then you are correct.

Sent from my SM-A505U using Tapatalk

[pasadenafr]

Keep in mind the 5 year rule, which states that on a conversion, you have to wait 5 years before you can access your principle with out penalty.  There is a five year rule for every conversion.

This is only on the taxable portion of the conversion. The non-taxable portion can be withdrawn immediately. The taxable portion comes out first, but it's likely to be minimal, especially with automatic conversions.

Are you positive?  If these are truely conversions, there is a five year waiting period on withdrawls of contributions before their penalty free.  If these are direct contributions to a Roth, then you are correct.

Sent from my SM-A505U using Tapatalk

They're not technically penalty-free, but the penalty applies to the taxable portion. In this specific case, this should be $0 since the automatic conversion is daily.

[terran]

Keep in mind the 5 year rule, which states that on a conversion, you have to wait 5 years before you can access your principle with out penalty.  There is a five year rule for every conversion.

This is only on the taxable portion of the conversion. The non-taxable portion can be withdrawn immediately. The taxable portion comes out first, but it's likely to be minimal, especially with automatic conversions.

Are you positive?  If these are truely conversions, there is a five year waiting period on withdrawls of contributions before their penalty free.  If these are direct contributions to a Roth, then you are correct.

Sent from my SM-A505U using Tapatalk

Yes, I'm positive. The penalty only applies to the taxable portion of conversions withdrawn within 5 years. Here's a helpful table that summarizes when there's a penalty and in what order additions to Roth are withdrawn.