What Is a Mega Backdoor Roth and How Does it Work?
Written by
Vance Cariaga
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Nicholas Morine
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For most Americans, Roth IRAs are a good retirement savings option because you can get tax-free income when you start withdrawing from the account. But not everybody can contribute to Roth IRAs because there are limits based on annual income. This means high earners must find another way to invest in a Roth IRA — and mega backdoor Roth IRAs are one of the options.
A mega backdoor Roth lets you work around limits set by the IRS if you’re a high earner. The process works similar to when you convert a traditional IRA to a Roth IRA. However, with a mega backdoor Roth IRA you can significantly lower or even eliminate the tax liability on the conversion, according to Motley Fool.
Before going into the specifics of a mega backdoor Roth, it’s good to remember the rules of a regular Roth IRA. As Yahoo Finance noted, your ability to contribute to a Roth 401(k) is not restricted by your income, but it is with a Roth IRA.
If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $153,000 for the 2023 tax year to contribute to a Roth IRA, according to the Motley Fool. If you’re married and file jointly, your MAGI must be under $228,000 for the 2023 tax year. The maximum annual contribution for all of your IRAs combined is $6,500 if you’re under age 50 and $7,500 if you’re age 50 or older. Those dollar figures go down as your income rises.
In contrast, the contribution limits for a mega backdoor Roth are much higher. For 2023, total mega backdoor Roth 401(k) contributions are capped at $66,000 for people younger than 50 years old. For people 50 and older, the limit is $73,500 per the Motley Fool. This is the upper limit, however, and doesn’t take into account any matching 401(k) contributions made by your employer, or your own 401(k) contributions.
Calculate Your Mega Backdoor Roth Contribution Limit
Calculating your own contribution depends on maximum 401(k) contribution limits and whether your employer offers a matching contribution on your deposits. You should consult with your plan administrator to find out more about how your 401(k) might impact your backdoor Roth IRA contributions. An employer match typically results in a lower contribution limit.
In order to move to a mega backdoor Roth IRA, Motley Fool recommends first maxing out your other retirement savings options. For 2023, you can contribute the maximum pre-tax $22,500 per year to your 401(k) if you are younger than 50. If you’re older than 50, you can contribute $30,000 per year.
Next, make the maximum contribution of $6,500 (or $7,500 if you’re 50 or older) to your traditional IRA account. Also, make sure you have a Roth IRA account opened. You’ll need to roll your 401(k) into a Roth IRA in order to then execute a mega backdoor Roth IRA.
If you make the maximum yearly pre-tax 401(k) contribution of $22,500 (or $30,000 if you’re older than 50), then you will need to subtract that from the mega backdoor Roth IRA limit to get your own mega backdoor Roth contribution limit.
A mega backdoor Roth IRA is a good option if you earn a high income and want another retirement savings vehicle that offers tax-free withdrawals in retirement. But it can be complicated getting all the rules straight, so always consult with your plan administrator first.
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