Math and taxes time, everybody!
Even better. As long as the Roth IRA has been open at least 5 years, rollover contributions can be tapped immediately. So the 5 year waiting period may be 0 years! http://www.investopedia.com/articles/retirement/09/roth-401k-rollover.asp#axzz1yMSOaL8U
That article refers only to post-59.5
distributions, not to any-age
withdrawal of principal. I believe that rule doesn't apply to conversions, based on
this bogleheads thread. For sure, you need to
wait five years for a traditional 401k, so I assumed a Roth works the same way. The thread appears to support that.
Am I correct in saying that only their contributions are accessible before 59.5? Employer match and non elective employer contributions are considered pretax contributions and can not be removed penalty free before 59.5. Please correct me if I am wrong.
I had always assumed that anything that got moved from a 401k account would be a contribution, but it makes more sense that the nature of each dollar in the account (
i.e., earnings or contribution) is preserved, which turns out to be the case.
The same vanguard thread explains that pretty nicely:
Your Roth 401k balance must be CHARACTERIZED as a certain type of Roth IRA balance. The [401k contributions are] treated as additional Roth IRA contributions bringing your total balance of these regular contributions up to 37k. The [earnings are] added to your Roth IRA earnings bringing that total up to 7k. Your total Roth IRA balance is 44k. You can take out up to 37k tax and penalty free.
So yes, you are correct. Next: employer contributions go into a regular 401k type account, yes. To convert them to a Roth IRA you would need to pay income tax on the entire value of employer match that's being converted (you get a 1099 from the brokerage); alternately, you could convert them to a traditional IRA, but then you'd need to be 59.5 to tap them.
Alright, now that that's out of the way, I have to ask, why the Roth 401(k)s?
This is yet another example of the Roth being worse for taxes but better because it allows contribution withdrawal penalty-free. The whole "retire in our mid 40s" component of the plan ruins the traditional 401(k) for this. In a minute, after I've thought about something other than 401(k)s for a second, I'll explain the tax-efficient alternative option to the OP, but in a nutshell you want to contribute to a traditional 401(k) and then convert one year of expenses each year and use them each converted chunk of money five years after the conversion.
You might consider making enough 401k contributions to the point where you're eligible to make Roth IRA contributions.
Their isn't an
income limit, so much as a range, for contributing to a Roth IRA. If you make just slightly too much and you manage to reduce your MAGI to just under the top of the range, you'll only be able to contribute $200. To get low enough to contribute fully, you'd have to generate a full $10k in deductions.
Since the first 20k you take each year from pre-tax accounts in retirement is tax free due to the standard deduction and personal exemptions, I recommend contributing such that you calculate you'll have least 500k in pre-tax accounts at retirement.
The pre-tax accounts sadly don't allow withdrawals in the mid-40s, when the OP will be retiring. As a side note, social security counts as taxable income, so the actual amount of tax-deferred income that doesn't get taxed is even lower.