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My company allows us to do in-service conversions such that we can use mega backdoor Roth.

If I convert my after tax contribution upon every paycheck into a Roth IRA (so this is pure after tax contributions with no earnings), can I withdraw it without penalty at any time? Or does the 5 year rule come into play?

Example

In 2018, I mega backdoor $10k of my after tax into a Roth IRA. I don't make any subsequent contributions.

In 2020, my Roth IRA is now worth $11k. Can I withdraw $10k immediately without penalty?

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  • What would be the sense? You put the money in the 401; convert it and pay taxes, and take it back out, so you are back to square one. If you never put it in the 401k in the beginning, you are at the same point.
    – Aganju
    Commented Jul 26, 2018 at 0:52
  • This is more about having the flexibility to withdraw my contributions should I need to in case of unexpected expenses or a change of circumstances rather than actually making the withdrawal immediately
    – Jeremy G
    Commented Jul 26, 2018 at 1:47

1 Answer 1

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My understanding is, assuming you have not made any taxable conversions to Roth IRA within 5 years and are not making any taxable conversions to Roth IRA this year, yes, you can withdraw it immediately without penalty.

Distributions from Roth IRA take money out in the following order: 1) contributions, 2) conversions and rollovers, and 3) earnings. Since the mega-backdoor is an after-tax contribution to a Traditional (not Roth) 401(k), a transfer to Roth IRA should be considered a conversion (#2). Conversions and rollovers further come out in a first-in-first-out order, aggregated by year, and with the taxable portion each year coming out before the non-taxable portion.

If you have made contributions, the first money you take out would be contributions, for which there is never any tax or penalty. Then it goes into conversions and rollovers. There is a penalty on early withdrawals of conversions and rollovers within 5 years of the conversion or rollover, but only on the part of the conversion or rollover that was taxable. Since the conversion you are doing is 100% non-taxable, there is no penalty on early withdrawals from this conversion, even within 5 years of the conversion. So the only issue would be if you had a previous taxable conversion within the last 5 years (or will make a taxable conversion later this year, since they are aggregated by year and the taxable portion is ordered first), that will be ordered before this current conversion; withdrawing from that conversion might trigger a penalty.

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