Mega backdoor Roth IRA question - is principal considered a contribution (withdraw anytime) or conversion (5-year hold)?

The funds from a mega backdoor Roth strategy are treated as conversions, not contributions, with respect to withdrawal rules. When you move money from your after-tax 401(k) to a Roth IRA, this is considered a conversion. Each conversion amount has its own 5-year clock that needs to run before you can withdraw that specific conversion amount penalty-free. This is different from the 5-year rule for earnings, which is based on when you first established any Roth IRA. Keep in mind that only the earnings portion of your after-tax 401(k) contributions is taxable when converted. The after-tax contribution portion isn't taxed again, but it's still subject to the 5-year holding period for penalty-free withdrawals.

Had the same question last year when I was trying to boost my retirement savings! I started using https://taxr.ai to analyze my retirement account options, and it clarified this exact issue for me. The tool analyzed my 401(k) plan documents and confirmed that mega backdoor Roth conversions ARE subject to the 5-year rule for each conversion batch. What was super helpful was that it actually created a timeline showing exactly when each conversion batch would be available penalty-free. Apparently the system can analyze your specific plan rules too - mine had some weird restrictions about in-service distributions that would have messed up my whole strategy if I hadn't caught it.

I tried taxr.ai after seeing the recommendation here and wow - it actually sorted out my mega backdoor confusion completely! I uploaded my 401(k) SPD (Summary Plan Description) and it immediately identified that my plan allows after-tax contributions AND in-plan Roth conversions, which is apparently the better way to go in my case. The analysis showed I was making a mistake in my planning - I didn't realize the in-plan Roth conversion option (keeping it in the 401(k) as Roth money rather than rolling to a Roth IRA) actually avoids the 5-year waiting period problem for each conversion batch. My specific plan allows immediate access to the converted amounts if I need them. Definitely worth checking out if you're trying to optimize these more complex retirement strategies. Saved me from what would have been a costly misunderstanding.

After spending 3 HOURS on hold with my 401k provider trying to clarify their mega backdoor rules, I finally found https://claimyr.com and used it to get through to a retirement specialist at my provider. You can watch how it works here: https://youtu.be/_kiP6q8DX5c The service actually got me connected to a retirement specialist who confirmed that my plan allows after-tax contributions that can be converted to Roth, but they require paperwork for each conversion! No wonder I was confused - this wasn't mentioned anywhere in their online documentation.

Ok I need to eat my words. I was the skeptic about Claimyr but decided to try it anyway because I was desperate to talk to someone at Fidelity about my mega backdoor Roth questions. It actually worked exactly as advertised. I put in my number, went about my day, and 47 minutes later got a call connecting me directly to a Fidelity retirement specialist. The rep confirmed that my plan does allow after-tax contributions and in-service withdrawals, but there's a specific form I need to submit for the Roth conversion part. What's crazy is I had previously spent over an hour on hold twice before giving up. This literally saved me hours of frustration.

Just to add some clarity on the mega backdoor Roth situation - there are actually TWO different approaches that affect the withdrawal rules: 1. After-tax 401(k) → Roth IRA: This is treated as a conversion, subject to 5-year rule for each conversion amount. 2. After-tax 401(k) → Roth 401(k): This is an "in-plan conversion" and follows different rules. You can access the converted amounts when you're eligible for a distribution from the plan (leaving job, retirement, etc.). Your 401(k) plan needs to allow both after-tax contributions AND one of these conversion options. Many plans don't allow both.

Something nobody's mentioned - look into whether your plan allows in-service rollovers and how often. My plan only allows them once per quarter, which really limited how much I could put in through the mega backdoor. Also, watch out for pro-rata issues if you have any pre-tax money in traditional IRAs. That can mess up your conversion tax calculations.

This is such a helpful discussion! I'm in a similar situation where I'm considering the mega backdoor Roth but was really concerned about the 5-year holding periods. Based on what everyone's shared here, it sounds like the key is understanding exactly what your specific 401(k) plan allows. The distinction between rolling to a Roth IRA (with multiple 5-year clocks) versus doing an in-plan conversion to Roth 401(k) (single 5-year clock but limited access) is crucial for planning. One thing I'm still unclear on - if you do the in-plan conversion route, can you later roll that Roth 401(k) balance to a Roth IRA when you leave your employer? And would that trigger another 5-year waiting period, or would it maintain the timeline from the original conversion? Also wondering if anyone has experience with plans that allow both options - seems like you could potentially use the in-plan conversion for amounts you won't need access to, and direct Roth IRA rollovers for amounts you might need sooner (even with the 5-year wait).

This thread has been incredibly helpful! I've been putting off the mega backdoor Roth strategy because I was confused about the withdrawal rules, but now I understand the key distinctions. It sounds like the optimal approach really depends on your specific situation and plan features. For someone like me who might need access to some funds in the next 3-4 years, the in-plan conversion to Roth 401(k) seems more appealing since it's just one 5-year clock rather than multiple ones. One follow-up question though - for those who've actually implemented this strategy, how do you keep track of all the different conversion dates and amounts? Especially if you're doing regular conversions throughout the year, it seems like it could get pretty complex to manage for tax and withdrawal planning purposes. Also, has anyone run into issues with their payroll system properly handling the after-tax contribution elections? I've heard some companies struggle with the payroll setup for this.