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What's a Mega Backdoor Roth?

While it might sound like a heavy metal band, the mega backdoor Roth is actually a tax-sheltered investment strategy for retirement.

Written by Jess Ullrich / July 7, 2022

Quick Bites

  • Backdoor Roths are a popular way for high earners to contribute to a Roth account, even if they exceed the typical income limits.
  • Mega backdoor Roths take these conversions up a notch, letting qualifying individuals contribute up to $61,000 (or $67,500 for those 50 and over) to a Roth.
  • Recent legislation may prohibit these conversions in the future.

The mega backdoor Roth is not, in fact, a heavy metal band, though it may sound like one, conjuring up images of hard-core rockers adorned in black leather and flashy tattoos. And while a mega backdoor Roth is pretty cool, metal it is not. (Womp, womp.) So if you’re seeking a new band with some fresh power chords and impressive hair, we’re sorry to say you’ll be disappointed.

But if you want a unique way to save for retirement, you’ve come to the right place. Here’s what a mega backdoor Roth is, how it works and why this retirement savings option has stirred up some big criticism.

Inside this article

  1. What's a Roth account?
  2. Backdoor Roth IRA conversions
  3. How does it work?
  4. What about contribution limits?
  5. What’s the pro-rata rule?
  6. And the risks are...

What's a Roth retirement account?

A Roth retirement account is a tax-advantaged—though decidedly non-metal—way to invest for your future. While it doesn’t offer any tax benefits the year you contribute because contributions are post-tax, you can make tax-free and penalty-free withdrawals after age 59 ½. It could be worth considering if you expect to be in a higher tax bracket later in life.

The one stipulation is that your account needs to be active at least five years before you can withdraw any gains, though your contributions can be withdrawn penalty-free. So if you start contributing to an account at age 56 ½, you’ll need to wait until you’re 61 ½ to withdraw any gains or you’ll incur a 10% tax penalty. Gnarly, dude.

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Roth IRAs have certain advantages over other types of retirement accounts. Unlike 401(k)s, there are no required minimum distributions. You can also contribute for as long as you earn a paycheck.

“Although you do not get a current tax benefit when making a contribution, your money grows tax-free forever!” says Jane Voorhees, director of financial planning at Aline Wealth. “This gives you a source of tax-free funds to draw on in retirement or, if you never need the funds, it can be a tax-free inheritance to leave to your heirs.”

So a Roth sounds awesome, right? Unfortunately, there are a few negatives to be aware of, including contribution and income limits:

  • Contribution limits for 2022 are $6,000 or $7,000 if you’re 50 and over.[1]

  • If you make over $144,000 as a single tax filer or $214,000 as a married couple filing jointly, you can’t contribute to a Roth IRA.[2]

Enter the backdoor Roth IRA conversion!

What are backdoor Roth IRA conversions?

A backdoor Roth IRA conversion gives high-income earners an option to contribute to a Roth—and get the tax advantages it provides. The process involves moving your money from a traditional IRA to a Roth IRA (or Roth 401(k) if your employer offers one.) (Makes you wonder if Ozzy used this strategy before Black Sabbath called it quits in 2017.)

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But this type of rollover doesn’t mean you’re off the hook with the IRS. You’ll still be taxed on any gains or contributions you’ve already deducted. So a backdoor Roth could result in a pretty hefty tax bill the year you transfer money. Still, it could be a valuable option if you’re interested in tax-free withdrawals in retirement.

So how does a mega backdoor Roth work?

As its name implies, a mega backdoor Roth could result in some mega savings. With this strategy, you can save up to $61,000 in a Roth IRA—or Roth 401(k) if your employer offers one—. But this type of conversion is also mega complicated, and we recommend getting advice from a financial pro if you go this route. Here’s how it works:

  • Max employee pre-tax salary contributions for a 401(k) are $20,500 (or $27,000 if you’re 50 or older) for 2022.

  • Certain (but not all) employer-sponsored 401(k)s let you: a) make in-service withdrawals, and b) make after-tax contributions up to $40,500. This assumes you don’t have an employer match, which we’ll discuss shortly.

  • In this scenario, you could transfer up to $61,000 (or $67,500 if you’re 50 or older) to a Roth account. You’ll pay taxes on any untaxed money you transfer, but you’ll also add a hefty sum into your Roth—and benefit from tax-free growth and withdrawals in retirement.[3]

But sometimes, it isn’t as simple as transferring $61,000 and paying a tax bill for the untaxed money. Other factors are at play, including retirement plan rules, employer matching and policy changes. For instance, some retirement plans don’t allow you to make in-service transfers; others don’t let you make after-tax contributions at all.

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Tell me more about how 401(k) contribution limits play into things

While a mega backdoor Roth can be a great way to save for retirement, things get a little hairy with employer matching—hair band pun intended. Let’s say you earn $160,000 in 2022 and contribute the max $20,500 to your 401(k). If you subtract that amount from the max 401(k) of $61,000, you’d be able to contribute $40,500 in after-tax dollars.

But here’s the tricky part: Your employer offers a 5% match, and this factors into how much you can contribute because the max contribution can’t exceed $61,000. So if you put in the $20,500 max and your employer matches that at 5%, you’d have a $10,500 match—a $31,000 total. You’d then need to subtract the $31,000 from $61,000, and your allowable contribution amount would be $30,000.

What’s the pro-rata rule have to do with it?

The IRS put the pro-rata rule in place to ensure it gets its cut if you decide on a mega backdoor Roth. This rule basically says you can’t decide to only roll over post-tax contributions to avoid a tax bill—you need to roll over an equal amount of pre-tax and post-tax contributions.

So if you’re transferring $30,500 in post-tax dollars, you’d need to transfer an equal amount of pre-tax dollars. Mega backdoor Roth = mega confusing contribution rules. Don’t proceed without help from a financial pro.

We’re hearing this mega backdoor business may be changing. What’s up with that?

Given that the mega backdoor Roth provides a tax-sheltered investment option exclusively available to high earners, it’s drawn some criticism.

Critics say it gives the wealthy an unfair advantage when it comes to taxes. Essentially, the feeling is that this type of transfer is a sneaky loophole used to amass a gigantic tax-advantaged retirement balance.

Recent legislation could also restrict these types of conversions in the future. The Build Back Better (BBB) act, which cleared the House of Representatives in early 2022, would wipe out backdoor Roth conversions if it gets through the Senate. (It’s currently on hold.)

Under the BBB, post-tax conversions from a traditional to a Roth account would be prohibited. And additional restrictions would prevent individuals with incomes over $400,000 or joint filers with incomes over $450,000 from making Roth conversions entirely. So instead of enjoying significant tax savings and headbanging all the way to the bank, high earners might need to find another investment option.

Article Sources
  1. “Retirement Topics - IRA Contribution Limits.” IRS. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
  2. “Amount of Roth IRA Contributions That You Can Make for 2022.” IRS. https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2022
  3. “401(k) Plans - Deferrals and Matching When Compensation Exceeds the Annual Limit.” IRS. ​​https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit

About the Author

Jess Ullrich

Jess Ullrich

Jess Ullrich is a personal finance writer who's been creating online content since 2009.

Full bio

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