The term “Mega Backdoor Roth” refers to a strategy for high-income individuals to contribute additional funds to a Roth IRA via their 401(k) plans. Here’s a brief overview of how it works and considerations for taking the money out after five years:
Mega Backdoor Roth Basics:
- This strategy allows you to make after-tax contributions to a 401(k) plan and then convert those contributions to a Roth IRA. This can be advantageous if you’re seeking to contribute more to a Roth IRA than the standard contribution limits.
Mega Backdoor Roth Withdrawal Rules:
- Roth IRA Contributions: You can generally withdraw your contributions (but not the earnings) at any time without penalties or taxes.
- Roth IRA Conversions: If you convert after-tax contributions from your 401(k) to a Roth IRA, the converted amount is treated as a Roth IRA contribution. To withdraw converted funds without penalties or taxes, the Roth IRA needs to meet the five-year rule.
- Five-Year Rule:
- Converted Funds: For conversions, the five-year clock starts on January 1 of the year in which you make the conversion. To avoid penalties and taxes on the earnings from these conversions, the Roth IRA must be open for at least five years.
- Roth IRA: If you’re withdrawing earnings (not contributions), the Roth IRA must be open for five years, and you must be at least 59½ years old to avoid penalties and taxes on earnings.
- Penalties and Taxes:
- If you withdraw converted funds before the Roth IRA has been open for five years, you may be subject to taxes and penalties on any earnings but not on the principal (conversion amount).
- There may also be specific tax implications based on your income and the amount converted.
In summary, you can generally convert after-tax 401(k) contributions to a Roth IRA and withdraw your contributions at any time. However, if you’re considering withdrawing earnings or converted amounts, ensure that your Roth IRA meets the necessary conditions to avoid taxes and penalties. Consulting with a financial advisor or tax professional can provide guidance tailored to your specific situation and ensure compliance with all rules.