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.
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
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.
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.