The Mega Backdoor Roth: A Sneaky but Legit Way To Boost Your Retirement Savings

Stash thousands more for retirement with the Mega Backdoor Roth.

Unless you’re the lucky recipient of an extreme financial windfall, it’s probably safe to say that you can never have too much money when you retire. So it makes sense to be on the lookout for ways to build up those funds. One way to boost your nest egg is by making the maximum contribution to a Roth Individual Retirement Account. But even if you don’t make enough money to contribute to a Backdoor Roth IRA, there is another way.

The solution? Beef up your retirement savings with a Mega Backdoor Roth. When you use this method, you’re able to boost your contribution to as much as $56,000 — $62,000, including catch-up contributions — for 2019.

To help you explore whether a Mega Backdoor Roth IRA might be right for you, and how it compares with other retirement savings options, here’s a quick look at what you’ll find here:

How Do You Know If You Can Make a Mega Backdoor Roth IRA Contribution?

You qualify for a Mega Backdoor Roth IRA, regardless of your income level, if your 401(k) plan allows for post-tax contributions and in-service rollovers. You’ll find the answers to these questions in your plan summary document. Otherwise, you can only take advantage of this financial quirk if you plan to qualify for a rollover by leaving your employer soon. You max out your post-tax contributions to your 401(k), then later roll the 401(k) money in a Roth.

If your plan allows post-tax contributions, ask your plan sponsor if there is room in the Actual Contribution Percentage test for you to make the contribution. If so, calculate it with the following steps:

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  • Add all of the employee and employer matches and contributions this year, not including any catch-up contributions.
  • Subtract the calculated amount from $56,000. The number you come up with is what you can contribute to the non-Roth, after-tax portion of the 401(k).

If your plan allows for in-service distributions and non-Roth, post-tax contributions are put into a separate account, you can make a Mega Backdoor Roth contribution. If not, you can still make the contribution but will lose some of the income tax benefits since you can’t immediately roll over the contribution. Instead, when you leave your employer, you can roll the non-Roth, after-tax portion into a Roth IRA. The earnings on that portion will be taxed as income upon the rollover to the Roth IRA.

Otherwise, when you are able to make the contribution properly, you can roll it after it’s made, along with the respective earnings, into a Roth IRA. The contributions will be non-deductible, but the earnings will be income tax- free after the rollover, resulting in tax savings.

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Roth vs. Traditional IRA vs. 401(k) Plans

Before you delve into deciding whether a Mega Backdoor Roth IRA is right for you, it helps to know the different types of retirement accounts:

Roth IRA

A Roth IRA is a type of individual retirement account — not sponsored by an employer — where your money can grow tax-free. It allows you to save for retirement even if you’re self-employed. You can also open and contribute to a Roth IRA if you’ve maxed out your contributions to your employer-sponsored plan and want to put additional retirement money aside to grow tax-free.

Roth IRAs have a 2019 contribution limit of $6,000 per year if you’re under age 50 or $7,000 if you’re at least 50. To be able to contribute the full amount, the income limitations require that your income must be below $122,000 if you’re single or below $193,000 if you’re married. Otherwise, your contribution must be at a reduced level.

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Traditional IRA

A traditional IRA is a retirement account into which you make tax-deductible contributions. Like a Roth IRA, it is not part of a retirement plan sponsored by an employer. You can have an IRA even if you’re part of an employer’s 401(k) plan. You do not have to pay tax on the earnings from the money in your IRA account until you retire and withdraw it. Not having to pay up front means potential tax savings if you’re in a lower income tax bracket.

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401(k) Plans

A 401(k) account is an account through which your employer allows you to save pretax dollars for retirement. You do not pay tax on the funds until you withdraw them. Some employers also offer Roth 401(k) plans, which require you to pay taxes upfront. As a result, withdrawals are tax-free in retirement.

See: 17 IRA Withdrawal Rules You Need To Know

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Roth vs. Traditional IRA vs. 401(k) Plan Comparison

This table gives you a quick comparison of traditional IRAs, Roth IRAS and 410(k) plans:

Roth IRA vs. Traditional IRA vs. 401(k)
Roth IRATraditional IRAPretax 401(k)
Contributions FromAfter-tax dollarsAfter-tax dollarsPretax dollars
Income LimitModified AGI married $203,000/single $137,000Same as Roth IRANo income limit
Maximum Elective ContributionContribution limited to $6,000 plus an additional $1,000 for employees age 50 or over in 2019Same as Roth IRAAggregate (Limitation is by individual, rather than by plan) employee elective contributions limited to $19,000 in 2019 (plus an additional $6,000 for employees age 50 or over)
Taxation of WithdrawalsWithdrawals of contributions and earnings are not taxed — provided it’s a qualified distributionSame as pretax 401(k)Withdrawals of contributions and earnings subject to federal and most state income taxes
Required DistributionsNo requirement to start taking distributions while owner is aliveApril 1 of the year following the calendar year in which you reach age 70 1/2Distributions must begin no later than age 70 1/2, unless still working and not a 5% owner

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2019 401(k) Contribution Limits

401(k) maximum contributions are restricted by the pretax deferral limit, which is $19,000 in 2019. If you’re at least 50 years old, you can make up to $6,000 in catch-up contributions to your 401(k). According to the IRS, the maximum contribution limit for 2019 is $56,000, which includes employer contributions, employee elective deferrals and forfeiture allocations. That total does not include any catch-up contributions.

The following table shows the 2019 contribution limits for 401(k) plans:

2019 401(k) Contribution Limits
Employee elective deferral$19,000
Catch-up contribution for contributors age 50 and over$6,000
Overall limit including the total of all employer contributions, employee elective deferrals (but not catch-up contributions) and any forfeiture allocations$56,000

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After-Tax Contributions Explained

The Internal Revenue Service publishes a document with details on the allocation of after-tax amounts to rollovers. It explains the rules for allocating your pretax and post-tax contributions among disbursements that go to multiple destinations from a qualified plan. It also details reporting requirements to the IRS, so you’re prepared to pay the proper income tax. Although the content may sound complicated, it also lays out examples. Consult the IRS document for further details if you plan to roll money into a Mega Backdoor Roth IRA.

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Roth IRA vs. Backdoor Roth IRA vs. Mega Backdoor Roth IRA

Backdoor Roth IRAs and Mega Backdoor Roth IRAs make use of a regular Roth IRA account. The main difference between the two backdoor accounts is that one mainly benefits people with high incomes, whereas the other is accessible to virtually anyone who needs a boost to their retirement plan, with no income limitations.

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Backdoor Roth IRA

A Backdoor IRA depends on a loophole that allows you to contribute to a Roth IRA even if you shouldn’t be eligible to do so based on your income. However, its contributions limits are quite restrictive, especially if you’re under the age of 50. In 2019 the limit is $6,000, plus an additional $1,000 for those ages 50 or over.

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Mega Backdoor Roth IRA

Unlike a Backdoor IRA, a Mega Backdoor Roth IRA uses a 401(k) plan rather than an IRA. You make the highest possible after-tax contributions to your 401(k), then roll that contribution over into a Roth IRA, thus bypassing the limits.

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Roth IRA vs. Backdoor Roth vs. Mega Backdoor Roth IRA Comparison

Below is a detailed comparison of Roth IRAs, Backdoor IRAs, and Mega Backdoor Roth IRAs to help you determine which one might be right for you. Your annual contributions cannot exceed your income. Rollovers have no limit and can only be done once in a 12-month period.

Roth IRA vs. Backdoor Roth vs. Mega Backdoor Roth
Roth IRABackdoor RothMega Backdoor Roth
Funding SourceAfter-tax dollarsIRA rollover401(k) rollover
Annual LimitContribution limited to $6,000, plus an additional $1,000 for employees age 50 or over in 2019Contributions to the traditional IRA have the same limits as Roth IRA; however, no limit applies to  amount that can be rolled over$56,000 ($62,000 including catch-up contributions) for 2019

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How a Mega Backdoor Roth Works

A Mega Backdoor IRA works by letting you use a 401(k) plan — as opposed to the IRA required by a Backdoor Roth IRA — to put aside extra retirement savings. Your contribution can be as much as $56,000, or $62,000 if you’re eligible for makeup contributions. The Mega Backdoor Roth method is usable even if you don’t meet the income threshold for a Backdoor Roth.

Like any retirement account, the Mega Backdoor Roth IRA has its benefits and drawbacks. It’s not right for everyone, but knowing the pros and cons can help you decide whether it’s a good option for you.

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Benefits

The main benefit of opening a Mega Backdoor Roth IRA is to be able to have a Roth IRA, and all its attendant benefits, even if you make too much money to open one in the traditional way.

Regular Backdoor IRAs only allow you to contribute $6,000 per year if you’re under age 50 or $7,000 if you’re at least 50. In comparison, a Mega Backdoor Roth IRA allows for contributions of up to $56,000 — $62,000, including catch-up contributions — for 2019.

While Backdoor IRAs benefit people with high incomes, Mega Backdoor IRAs are accessible no matter how much or how little you make.

A Mega Backdoor Roth also makes it easier to leave money to heirs because Roth IRAs have no requirement forcing you to withdraw the money within your lifetime.

Although IRS rules are unclear on whether Backdoor IRAs are allowed, Mega Backdoor Roth IRAs are specifically allowed under an IRS rule first published in 2014. People with Backdoor IRAs could be penalized in the future if the IRS or Congress scrutinizes Backdoor IRAs and doesn’t grandfather them in, but that risk is absent with Mega Backdoor IRAs.

Learn: How To Use Your IRA as a Last-Minute Tax Deduction

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Drawbacks

You may not be able to use the loophole for a Mega Backdoor Roth because you can only do so if your 401(k) plan has rules allowing for after-tax contributions. If it does, your plan must allow for in-service rollovers. Otherwise, you’ll have to be planning a job change, which automatically makes you eligible for a rollover.

If you’re self-employed, a Mega Backdoor Roth might not be helpful for you. If your income is below $56,000, then your 401(k) plan contributions are subject to income limitations based on how much you make. If you’re on the higher end of the scale and make more than $280,000, a Mega Backdoor Roth is irrelevant. At that income level, you’re allowed to contribute the maximum amount to your 401(k) account without worrying about going through a roundabout method.

You could end up paying unexpected taxes if you don’t handle your Mega Backdoor Roth IRA appropriately. You cannot simply roll over your after-tax contributions while leaving the remainder of the money in your 401(k) untouched. Partial rollovers are treated as a pro-rata combination of pretax and after-tax contributions.

To avoid this, you can do a single rollover that you channel to multiple destinations. While the after-tax contributions go to your Mega Backdoor Roth, the pretax amounts can go to a Roth or a retirement plan.

You may need to hire a tax advisor or professional accountant to make sure you handle your Mega Backdoor Roth appropriately. Otherwise, you could incur taxes on the rollover due to the rules against rolling over only your after-tax contributions.

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How To Do a Mega Backdoor Roth IRA Conversion

A Mega Backdoor Roth IRA conversion requires four steps — or five if you don’t already have a Roth IRA. Follow the steps below to do the conversion properly:

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  1. Check your employer’s 401(k) plan rules to make sure they allow for in-service rollovers. If not, you cannot proceed unless you plan to quit your job in the near future, making you eligible for a rollover.
  2. Check the current limits for maximum contribution limits for your 401(k) at your income level.
  3. Make up to the maximum amount in after-tax contributions to your 401(k) plan.
  4. Open a Roth IRA if you don’t already have one.
  5. Roll that after-tax contribution into your Roth IRA.

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Is the Mega Backdoor Roth the Best Option for Your Retirement Savings?

You can never have too much money when you’re in retirement, and the Mega Backdoor Roth IRA lets you add to more your nest egg. If you’re part of a 401(k) plan and qualify for this retirement savings option, it’s worth calculating whether you have enough money to contribute now to get a bigger retirement payoff later. You must be willing to set it up correctly or get a professional to help you, but the extra money could make a big difference for your future.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.