Money

Did this noob get After Tax and Roth conversion right?

New / EngZa4rt8
Jan 7

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 Earnings can be withdrawn tax free and penalty free only after 59, if account has been open for 5 years.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.

6) profit.

Anything I'm missing?

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  • Microsoft Noli88
    No. 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
    Jan 78
    • New / EngZa4rt8
      OP
      I read some people on blind call fidelity after every paycheck for conversions. I guess that would allow more tax free growth than quarterly conversions.
      Jan 7
    • Microsoft / EngHarmar
      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.
      Jan 7
    • Microsoft / EngHarmar
      As others have said, you don't go Roth 401k to Roth IRA. You go AT to Roth 401k *OR* Roth IRA. Don't set automatic conversions if you intend to go to Roth IRA.
      Jan 7
    • New / EngZa4rt8
      OP
      Even withdrawing principal is penalized before 5 years? I thought only earning.
      Jan 7
    • General Mills / DataBettyCoder
      Different rules for conversions. Also, what is your intention with this? Were you trying to do mega backdoor Roth?
      Jan 7
    • New / EngZa4rt8
      OP
      Yes, mega backdoor roth.
      Jan 7
    • Salesforce 2438ez
      Withdrawing 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/
      Jan 7
    • Microsoft Noli88
      I do it every paycheck. But I contribute as much as possible so it's only a few out of the year. You can put money into short term bonds while waiting if do quarterly. The tax is not that much
      Jan 7
  • New Baboly
    You either do 2 only and skip 3, or you skip 2 but in step 3, convert from after tax to Roth 401k or Roth IRA.
    Jan 70

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