Assume using Fidelity at Msft.
1) I contribute to "after tax" 401k bucket.
2) I select automatic conversion quarterly to Roth 401k.
3) At the end of quarter I call Fidelity and ask them to convert the Roth 401k funds to my Roth IRA, assuming I opened an account in the meantime. (Don't have it currently). This conversion makes the earnings also tax free.
4) Once the funds are in my Roth IRA, I can withdraw the "principal" tax free and penalty free anytime. Earnings can be withdrawn tax free and penalty free only after 59, if account has been open for 5 years.
5) I should keep documents of the contribution amounts/times and transfers to Roth IRAs times to only withdraw principals.
Anything I'm missing?
- Microsoft Noli88No. Step 2 and 3 don't mix. You either convert from after tax non deductible 401k to Roth 401k or to Roth IRA. I have not seen anyone convert a Roth 401k to Roth IRA while they are still working at the company. I don't even know if that's possible. You can't avoid paying tax on your earnings. When you do step 2, that will trigger a tax on your earning. If you skip 2 and do 3, you also pay tax on earnings. Converting from after tax non deductible 401k to a Roth account, 401k or IRA, are both allowed depending on your plan. However for some reason, Fidelity allows you to do after tax 401k to Roth 401k conversion automatically but not for Roth IRA
- You can do a manual conversion (to Roth 401k or Roth IRA) as often as you wish, it's up to you if it's worth the effort to do it every paycheck.
I've heard some people were able to convert only the principal and roll over the earnings portion to a traditional IRA. I don't know the details since I use the Roth 401k, myself.
Principal withdrawals are possible from Roth IRA, however the roles for withdrawing conversions are more complicated than the ones for withdrawing regular contributions. Starting with not being able to withdraw without penalty until five years after conversion.
- Salesforce 2438ezWithdrawing a Roth conversion before five years is penalized, yes. Direct contributions to a Roth IRA (if you were allowed to make them) can be withdrawn without penalty, assuming you have a Roth IRA that has been open for five years. Basically a conversion takes five years to “become” principal in your account. https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/