1) Can I contribute up to my employee maximum to 401(k) and then convert the after-tax portion to an outside Roth-IRA?
2) If so, does this affect my ability to make a $5,000 backdoor Roth-IRA contribution?
You may defer taxation on the taxable portion of certain withdrawals/distributions from the non-Roth accounts by making a rollover to an eligible plan or an IRA. You may also defer taxation on the taxable portion of certain withdrawals/distributions from the Roth accounts by making a rollover to an eligible plan or a Roth IRA.
Generally, all withdrawals/distributions (taxable and non-taxable) may be rolled over into an eligible plan except:
Any eligible rollover amount paid to you (i.e., not made as a direct rollover) will be subject to 20% income tax withholding on the taxable amount to the extent of the cash received. No withholding is required on withdrawals/distributions consisting solely of MegaCorp stock.
- Hardship withdrawals.
- MegaCorp stock direct dividend payments.
- Distributions to retirees required after attaining age 70-1/2 (minimum distributions).
- Loans declared in default and treated as taxable distributions.
The total amount of the withdrawal/distribution (including the amount withheld) is still eligible to be rolled over to an eligible plan or IRA within 60 days from the date received. Any taxable amount that is not rolled over within the 60-day period must be included in taxable income and also may be subject to an additional 10% tax (explained above).
You may elect to have no income tax withheld on the taxable portion of an amount that is not eligible to be rolled over. If no election is made, withholding will be at 10%.
In-Plan Roth Conversions
Once a year, you may also convert amounts in your non-Roth accounts into the Roth Conversion Account. Generally, you can only convert amounts in existing non-Roth accounts in which you are fully vested and amounts which, if distributed, can be rolled over to an IRA.
- Employees younger than 59½ can convert a portion or all of the balance in their After-Tax, General, and Stock Match Accounts to the Roth Conversion Account. However, funds in the Before-Tax Account cannot be converted.
- Employees 59½ or older can convert a portion or all of the balance in their Savings Plan Account to the Roth Conversion Account.
- Retirees and terminees can convert a portion or all of the balance in their Savings Plan Account to the Roth Conversion Account.
At the time of conversion, you will incur tax liability as if the converted assets were distributed to you. However, any MegaCorp stock converted is taxed at fair market value and the additional 10% early withdrawal tax does not apply.
If the amount converted is withdrawn/distributed within 5 calendar years from January 1 of the year of conversion, the additional 10% tax may apply. See section titled "Additional 10% Tax if You Are Under Age 59-1/2" above.
There is no income tax withholding on the amount converted so you are responsible for estimating and paying the amount of tax owed.