The Mega Backdoor Roth: What is it and what do you need to know about it

If you pay attention to financial news, you might have heard about the Backdoor Roth or maybe, some Mega Backdoor Roth strategies.

So, what are they, and how can you benefit from them? If you’ve ever wondered what a Backdoor Roth or Mega Backdoor Roth strategy is, here’s what you need to know.

What is a Roth IRA?

A Roth IRA is a savings vehicle that works like this: You put money into your account AFTER you pay income tax on it, so they grow tax-free. But there are rules about who can contribute to a Roth IRA and how much you can put in each year. In 2021, the limit was $6,000; $7,000 for those 50 and up.

What is a Backdoor Roth?

A Backdoor Roth is simply a means for taxpayers who can’t make direct contributions to their Roth IRA because of income restrictions (meaning they make too much money) getting to do it anyway through a “backdoor.” Basically, someone can deposit the maximum amount into your traditional IRA and then quickly roll it to a Roth IRA. A potential downside? You might get hit with a meaty tax bill on your rollover.

What is a Mega Backdoor Roth?

A Mega Backdoor Roth is the next level up. It means making contributions to your employer’s retirement plan and converting that money to a Roth IRA or a Roth 401k inside of the retirement plan.  The risk is, again, a big tax bill, so it’s best not to attempt this on your own (we recommend talking to an accountant or financial planner!).

In a nutshell, there are several strategies for both a Backdoor Roth and Mega Backdoor Roth. The main sticking point is if your employer retirement plan lets you make after-tax contributions, allows for in-service withdrawals or in-plan Roth conversions. If it does, you might be able to make it work. If it doesn’t, you are most likely out of luck.

If you can’t do a Backdoor Roth, or Mega Backdoor Roth, don’t worry about it. It is only one way to reap the benefits of a Roth IRA and you aren’t really losing out if you can’t make one of them work.

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