What Is a Mega Backdoor Roth and How Does it Work?

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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.

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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.

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If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $144,000 for the 2022 tax year to contribute to a Roth IRA, according to Charles Schwab. If you’re married and file jointly, your MAGI must be under $214,000 for the 2022 tax year. The maximum annual contribution for all of your IRAs combined is $6,000 if you’re under age 50 and $7,000 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 2022, total mega backdoor Roth 401(k) contributions are capped at $61,000 for people younger than 50 years old. For people 50 and older, the limit is $67,500.

Those numbers don’t apply to everyone, though. 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.

In order to move to a mega backdoor Roth IRA, Motley Fool recommends first maxing out your other retirement savings options. For 2022, you can contribute the maximum pre-tax $20,500 per year to your 401(k) if you are younger than 50. If you’re older than 50, you can contribute $27,000 per year.

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Next, make the maximum contribution of $6,000 (or $7,000 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 $20,500 (or $27,000 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. For example, subtracting $20,500 from $61,000 leaves a maximum backdoor Roth IRA contribution of $40,500 for the 2022 tax year.

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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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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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