Author Topic: After-tax 401k --> Mega Backdoor Roth IRA --> Early Withdrawal  (Read 2527 times)

lostmonkey007

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After-tax 401k --> Mega Backdoor Roth IRA --> Early Withdrawal
« on: February 01, 2018, 09:37:17 AM »
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« Last Edit: February 16, 2018, 11:07:38 AM by lostmonkey007 »

MaikoTsumi

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Re: After-tax 401k --> Mega Backdoor Roth IRA --> Early Withdrawal
« Reply #1 on: February 01, 2018, 10:14:11 AM »
You need to hold it in the Roth 5 years to escape the penalty.

seattlecyclone

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Re: After-tax 401k --> Mega Backdoor Roth IRA --> Early Withdrawal
« Reply #2 on: February 01, 2018, 10:41:24 AM »
Yep, the 10% early withdrawal tax only applies to the part of the conversion you paid tax on at the time you moved it into the Roth IRA. The principal was already post-tax and was not taxed again at conversion time, so the 10% penalty would only apply to the $2 of growth in between the after-tax contribution and the Roth conversion.

seattlecyclone

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Re: After-tax 401k --> Mega Backdoor Roth IRA --> Early Withdrawal
« Reply #3 on: February 01, 2018, 02:24:35 PM »
Yep, looks right to me.

seattlecyclone

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Re: After-tax 401k --> Mega Backdoor Roth IRA --> Early Withdrawal
« Reply #4 on: February 01, 2018, 04:47:48 PM »
Yep, looks right to me.

Awesome, good to know.  Another interesting question for 2018:

+  2018:  I did the standard $5,500 Backdoor Roth IRA contribution (I had a <$0.50 of taxable growth upon conversion, rounds to zero)
+  2018:  I will also have done $29,000 Mega Backdoor Roth IRA (let's assume I have a $100 of taxable growth)

When we get to these 2 set of funds in the Roth Withdrawal order.  Will this be the order?

Because I can choose either the Backdoor Roth IRA conversion or the Mega Backdoor rollover (since they are both conversions/rollovers), I can choose to go in this order:

+  Backdoor Roth IRA:  No taxable portion (as taxable growth <$0.50, rounds to zero), so I can just access the $5,500 penalty-free under 5 years
+  Mega Backdoor Roth IRA:  Pay the 10% penalty on the taxable portion, i.e. $100 taxable gain, then I can access the $29,000 penalty-free under 5 years


Conversions done in the same year are all lumped together into one, so the $100.50 of taxable growth would go before the $34,500 of principal in the ordering rules.

the_fixer

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Re: After-tax 401k --> Mega Backdoor Roth IRA --> Early Withdrawal
« Reply #5 on: February 02, 2018, 03:01:39 PM »
I am putting a large amount into my after tax 401K later this year then immediately rolling it over to a Roth IRA but had a different understanding. Maybe a 3rd option?

Keeping it simple I will use the same dollar amounts

+ $2,368 after-tax 401k contribution
+ During the time the funds remained in the after-tax 401k, there was $2 of taxable growth
+ Roll over the combined $2,370 into a Roth IRA

My understanding was that if you rolled it all over to a Roth IRA the $2 would be taxed at your tax rate this year but all growth would be tax free in the future hence the reason you want to make the conversion as fast as possible?

Am I mistaken? 

the_fixer

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Re: After-tax 401k --> Mega Backdoor Roth IRA --> Early Withdrawal
« Reply #6 on: February 02, 2018, 03:39:54 PM »
I guess I am confused why you would pay taxes and penalties on the gains when you already paid the tax on the gains when you rolled them over?

Explanation 1:

+ First out is the $2, as it is the taxable part of the rollover. I pay taxes and early withdrawal penalty (10%) given under 5 years.
+ Subsequently, the $2,368, as it is the non-taxable part of the rollover, is now accessible to me penalty-free?  Or is also susceptible to a 10% early withdrawal penalty?

If that is the case it would be better to direct the rollover to two different accounts as allowed by the IRS correct?
« Last Edit: February 02, 2018, 03:41:28 PM by the_fixer »

the_fixer

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Re: After-tax 401k --> Mega Backdoor Roth IRA --> Early Withdrawal
« Reply #7 on: February 02, 2018, 03:50:18 PM »
Perfect, you had me worried that I was going to be double taxed on the gains :)