Mega backdoor Roth IRA with Fidelity
Am currently maxing out my 19.5K pre-tax 401k contributions + the company match. I've started after-tax contributions recently and have setup automatic in plan Roth conversions. I can see my after tax dollars convert to Roth 401K. However am still not sure if this the right strategy. My roth contributions (principal) are locked in until 59.5y and cant be withdrawn without penalty for kids' college expenses or buying a house (as an example). However if the after-tax money gets converted to Roth IRA, I believe I can withdraw my contribution anytime (incl <59y) without penalty & taxes (Assuming its held min 5 years after conversion). Also since Roth IRA doesnt have RMD (min distribution at 72), it seems much more attractive added with the flexibility to invest in wider options. If my assertions above are correct, 1. Why would someone convert after tax dollars to Roth 401k and not Roth IRA ? 2. How would you do this with Fidelity ? If you open an IRA account with them, does it get any easier to automatically convert after tax $ after every paycheck ? Would there be a window where the after tax $ can accrue earnings before getting converted to Roth IRA ? #401k #ira #fidelityinvestments #investments
Sometimes the 401k plan has cheaper funds than you would typically have access to so if you were to say, invest in an S&P 500 index fund anyways, it might be cheaper to just keep it in the 401k plan. This also means you typically can’t invest in anything else outside of those funds though. If there’s auto in plan conversions, usually they avoid any after tax gains so you should have minimal if any gains for tax reporting purposes. To do a conversion from Roth 401k to Roth IRA, you usually have to call your brokerage and initiate it (at least if you do the auto in plan conversion as well).
You need to contribute to after tax 401k, not opt for any conversions, call fidelity and ask them to move it to your Roth IRA. That's how megabackdoor works.
This isn’t really true. At Google, we have the option to either take the auto in plan conversion for after tax to Roth 401k and then call in when we want to funnel the money to a Roth IRA instead or we can just set it up so that we opt out of the auto conversion but then manually have to click a button to convert after tax to Roth IRA after each paycheck (this might accrue gains as well that you would have to report when filing your taxes).
@Google so it means vanguard after-tax to vanguard roth 401k (auto-conversion) and then to vanguard roth IRA (phone call)?
I’m pretty sure you could withdraw the contribution to Roth 401K penalty free. Most companies give you a convenient way to do a mega backdoor into a Roth 401k. You can always rollover your Roth 401k to Roth IRA.
Roth 401k has penalty if you withdraw < 59.5y unlike Roth IRA primarily because in Roth IRA you can withdraw from just your contributions (thereby no penalty) whereas you can't control that in Roth 401k. Taking a loan from 401k upto 50k is the way around to this. https://money.usnews.com/money/blogs/planning-to-retire/articles/2016-05-20/6-ways-roth-401-k-s-differ-from-roth-iras
Roth IRA got the ordering rule, so if you keep track of your contribution/rollover correctly, you can take most contribution out without penalty. Roth 401k got the pro-rata rule. If you take money out, you need to take a prorata mix of contribution and gain. And tax and penalty applies to the gain part.
Related questions: 1) can you fund your Roth IRA through megabackdoor with personal funds like a checking account (not through empower after-tax contributions)? 2) it states that you can withdraw your initial funds tax free before 59.5, but not the gains. How does that work? Let’s say in 2020 I put 1 share of a stock worth $1000. In 2030 the stock is worth $1500. I should be able to withdraw $1000. Can I somehow withdraw the stock or do I need to sell it for $1500, withdraw $1000 and then buy the same stock again for the remaining $500?
1) No, if you are contributing thru backdoor it has to come from employer thru pay check deduct
I think you have quite a misunderstanding in terms of how this works for 2). You never put in “stock” or “shares.” You’re putting in money into an account that let’s you transact shares of companies or bonds or whatever. The principal is based on the amount of money you fund it with so in your case, you would put in 1K. If you want to pull out your principal, you have to sell the stock, pull out your principal amount, and then do whatever you want with what’s leftover but you can’t withdraw that without penalty. Think about it, if they let you withdraw the stock, then you would be evading the penalty on the gains.
I do it because fidelity offers automatic rollover to Roth 401K but not ira. So I’m lazy to call them to do it to the ira.
Does Microsoft allow rolling over Roth 401K to Roth IRA when you quit ? Any tax implications if so ?
You can always roll over 401k when you quit. It’s only when you’re employed that there are restrictions