Don’t get me wrong, the Mega Roth is amazing, but I would suggest you don’t even think about it unless you’ve seriously considered the other strategies above AND have an extra 50k+ to set aside for savings without the need for a current tax deduction.

A Mega Backdoor Roth is a strategy to put away as much Roth money as you legally can in one given year. It doesn’t matter how old you are and there is no phase-out or income limit. If you want to maximize your Roth contributions you need to understand the magic of the Mega Backdoor Roth! Investment accounts are crucial for your future, including a 401K.

However, be forewarned, it’s not as simple as making one call to your financial advisor or your HR Department and saying “do it”. The process will require some strategy and planning with your tax professional.

Moreover, your age, income, employment, and marital status, as well as your self-employment income will all factor into the masterful equation. However, it can blow your mind! (O.K.…that was a little much, but we geeks think the “Mega Backdoor Roth” is pretty cool.)

What Exactly is the “Mega Roth”?

Essentially, it’s being able to contribute to a Roth at ANY age and at ANY income level in 2022 in the following amounts:

• $67,000 if under age 50
• $74,500 if 50 or older

Yes…that’s right! You thought you could only do 6k or 7k…or maybe you heard you could do a Roth 401k from $20,000 to $27,000…well it gets better!! There are several ways to explain the strategy, and some may even say a lot of confusion. I like to keep it simple with the following definition: 

A Mega Backdoor Roth is simply a combination of stacking your IRA and 401k contributions on ‘Day 1’, and then doing some Roth conversions on ‘Day 2’

Now keep in mind there is NOT (1) Mega Backdoor Roth – no such thing exists. Rather it’s a bundle of strategies to get the maximum contribution in any given year. More specifically you’re going to use multiple Roth structures and strategies (401ks, IRAs, conversions, non-deductible contributions, and after-tax contributions) to defer as much as possible in Roth money in a given year. 

When Does it Make Sense to use the Mega Backdoor Roth?

When you want to put a butt load of money into a Roth account! Well, ok…it’s a little more strategic that that.

I like to see my clients take a holistic approach to their wealth building, tax planning, and asset protection. Thus, I suggest they check off several items on their “strategy checklist” before they embark on the Mega Backdoor Roth.

Have you Already Completed or Considered all of the Following this Year?

• Participated in your 401k at your day job up to the ‘matching amount’ (if applicable)
• Funded your:
  • Roth or Backdoor Roth IRA up to $6,000 or $7,000?
  • Health Savings Account – HSA (individual or family) $3,650 or $7,300 (for 2022)?
  • Spouse’s Roth or Backdoor Roth IRA (if applicable)?
  • Children’s Roth IRAs (if applicable)?
  • Parents Roth IRA (if applicable)?
  • Kid’s Education Savings Accounts – ESA up to $2,000 per child (if applicable)?
• Purchased a rental property interest (not in a REIT or PPM)

Don’t get me wrong, the Mega Backdoor Roth is amazing. Although, I would suggest you don’t even think about it unless you’ve seriously considered the other strategies above AND have an extra 50k+ to set aside for savings without the need for a current tax deduction.

Admittedly, I realize I’m a little opinionated on this topic. I know some financial or tax advisors won’t agree with my approach to the Mega Backdoor Roth. Too bad. This is what I see my wealthy and successful clients doing. I don’t get paid a commission or a percentage of ‘money under management’. 

Steps to Fund this Mega Backdoor Roth

First, keep in mind the “numbers” will actually vary depending on your age and possible matching with a day job, solo-401k, or even a safe-harbor 401k in your own small business.

Next, you must be enrolled in an employer-sponsored traditional 401(k) plan that permits after-tax contributions and in-service withdrawals…OR if you have your own small business, you will be able to adopt the provisions you want in your own Solo 401k and won’t be dependent on an ‘employer’.

Here is a visual representation of how it may look as you combine these different accounts and contributions:

Step 1: Make your Regular Roth IRA Contribution

Depending on your age, you can make a contribution of either $6,000 or $7,000 into an individual Roth. If you make too much for a regular Roth IRA contribution (phase out is AGI of $129,000 – $144,000 if Single, or $204,000 – 214,000 if Married), then this is where the ‘Back Door’ method comes into play. 

This is a ‘two-step’ process within Step 1…and very common so don’t stress. 

• You first make a non-deductible contribution to a traditional IRA that you then convert to a Roth. However, make sure a reporting period (for example a month) goes by before doing the ‘conversion’ to a Roth. Some financial services companies get confused if you try to do the conversion on the heels of a contribution. They may assume you wanted a Roth in the first place, but not know that you didn’t qualify.
• Next, you convert the traditional IRA contribution you just made to a Roth. You have until December 31 of each year to convert as much as you want. HOWEVER…a word of caution. You first have to convert ANY other Traditional IRA money to Roth before you can convert the contribution you just made.

PRO TIP FOR SMALL BUSINESS OWNERS WITH A SOLO 401k: If you roll your old Traditional IRA money into your 401k account you don’t have to convert it to Roth before doing the Roth conversion on your current contribution. (This is what we tax lawyers call a ‘loop hole’). 🙂 

Step 2: Contribute your Roth 401(k)

Next, in order to build that “Mega Backdoor Roth”, you need to max out your annual contributions to your Roth 401k. Depending on your age this will either be a maximum of $20,500 or $27,000. If you participate in two (2) 401ks (maybe a day job and a Solo 401k), be strategic on how much you contribute to both. For example, you might put $5,000 into your ‘day job’ 401k, in order to get the match, and then the remaining $15,500 into your Solo 401k (assuming you’re under age 50). 

It’s critical you indicate this as a Roth contribution. You are allowed to this do at any age and any income level. This WILL NOT be converted to Roth dollars later. It’s Roth money right from the outset.

Step 3: Consider the Company Match

If you participate in an employer-sponsored plan there will typically be a ‘match’ portion to your 401k, as an example lets say maybe 5% of your compensation (a typical safe-harbor plan). If you have an $80,000 salary, the company would match up to $4,000 of your Roth contribution. 

This money is considered ‘traditional’ and you will need to convert this to Roth on ‘Day 2’ (a similar process to that of the Roth IRA conversion above in Step 1). Speak with your 401k administrator to complete the paperwork and the ‘conversion’ of the company match to a Roth.

For those of you with a Solo 401k, I suggest you skip the ‘matching strategy’. You should proceed directly to Step 4: After-Tax Employee Contribution below. This is because the matching is really unnecessary in a Solo 401k structure when you have the proper plan documents.

Step 4: Make an After-Tax Employee Contribution

This is where things get a little dicey. This step in the strategy depends on your employer’s 401k plan. In 2021, an individual and employer can contribute up to $58,000 into the employee’s 401k account. The ‘math’ involves subtracting what ‘you’ the employee contributed, and any match, from the $58,000. This calculation determines the amount of ‘after-tax’ contribution.

EXAMPLE: Your 401(k) employee contribution limit in 2021 is $19,500, or $26,000 if you’re 50 or older. Next, an employer can contribute enough to bring your total contribution to $58,000, or $64,500 if you are 50 or older. Assuming your employer doesn’t make any contributions, the maximum you can contribute in after-tax contributions is $38,500 (or $45,000 for people 50 or older) in 2021.

Step 5: Use the In-Service Withdrawal Provision

The in-service withdrawal provision is a necessary part of the Mega Backdoor Roth process. An employee who makes the after-tax contribution (Step 4 above), then immediately takes an in-service withdrawal before the contributions generate returns that would be taxable during a rollover to a Roth. The “withdrawal” is essentially transferred to a Roth IRA as a ‘conversion’. No tax is due, but of course, you didn’t receive a deduction either with the contribution in the first place.

Next Level Strategy

Taking all of this Roth money and then utilizing it with the ‘self-directing’ strategy is truly just putting it on steroids. Successful clients typically self-direct a good portion of their retirement account. They also usually invest directly into real estate, precious metals, crypto, small business, etc… The results can be incredible! 

It’s not uncommon to see 10-20% rates of return in self-directed accounts because business owners and investors are investing in ‘what they know’ and typically in closely held projects