1

The so-called "Mega Backdoor Roth IRA" was coined in the following article in 2014:

I don’t hear about new ideas very often, but here is one that a few people might find very useful. I call it the “Mega Backdoor Roth IRA.”

https://www.whitecoatinvestor.com/the-mega-backdoor-roth-ira/

401(k) plans normally have an annual contribution limit of $19,000.

Using the "Mega Backdoor" strategy, employees can seemingly attain an annual 401(k) contribution grand total of $56,000 made up of pre-tax contributions, company match, and after-tax contributions.

Some of this 401(k) money can then be rolled into a Roth IRA, above and beyond the normal Roth IRA $6,000 annual contribution limit.

How does a Mega Backdoor Roth IRA work?

What 401(k) plan requirements are needed to enable this additional saving?

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The Mega Backdoor Roth IRA is achieved by contributing additional after-tax money to a 401(k), and then rolling those contributions into a Roth IRA.

Roth IRAs normally have an annual contribution limit of $6,000. Using a fully optimized Mega Backdoor Roth IRA allows ~$30,000+ of additional annual contributions to the Roth IRA.


Contributions Limits

401(k) plans have an annual pre-tax contribution limit of $19,000 for the employee.

Employers then regularly contribute additional funds to the 401(k) via "company match".

The grand total for employee plus employer contributions is set at $56,000 per year.

+ $19k (pre-tax  employee contributions)
+ $ X  (company match)
+ $ Y  (post-tax employee contributions) <- Mega Backdoor Roth IRA opportunity
  =======
  $56,000

The remainder of $56,000 minus pre-tax contributions and company match represents the Mega Backdoor Roth IRA opportunity.


401(k) Plan Requirements

Only certain 401(k) plans will qualify for the Mega Backdoor Roth IRA, as it requires two somewhat rare features:

  • Allow post-tax contributions to the 401(k), above the $19,000 pre-tax limit.
  • Allow in-service, non-hardship withdrawls of that post-tax money, to be rolled into a Roth IRA.

Workflow

If these two plan requirements are met, employees can set their payroll system to automatically contribute post-tax money to their 401(k) with each paycheck.

The employee should then regularly make in service, non-hardship withdrawls of that recently-contributed money, sending it directly from the 401(k) to their Roth IRA plan administrator.

At the end of the year, all post-tax contributions from the 401(k) will have been rolled into the Roth IRA. This represents a substantial increase in Roth IRA contributions over the normal annual maximum of $6,000.

  • 1
    It's worth mentioning that there are also Roth 401(k) contributions, which are also under the $19k limit. – user102008 Nov 2 at 17:11
  • The requirements section is somewhat incomplete... as an alternative to in-service, non-hardship withdrawls of that post-tax, there is also a possibility of in-plan conversion of post-tax contributions to Roth, although strictly speaking while that is a Mega Backdoor Roth loophole, it is not a Mega Backdoor Roth IRA – Ben Voigt Nov 4 at 20:22
  • @BenVoigt good info. A separate answer for that strategy would be very welcome here. – pkamb Nov 4 at 20:26

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