What is a Mega Backdoor Roth Contribution?
A Mega Backdoor Roth Contribution is not as scary as it sounds. Here’s how it works:
- You make a non-Roth after-tax contribution to an employer 401(k) plan (if permitted by the employer’s 401(k) plan specifications).
- Then that contribution is rolled into a Roth IRA, either immediately or when you leave the company.
Using a Mega Backdoor Roth Contribution strategy, you could contribute tens of thousands of dollars into a Roth IRA. However, the rules are very restrictive and can be difficult to navigate.
How is a Mega Backdoor Roth Contribution different from a Backdoor Roth Contribution?
A Backdoor Roth Contribution generally involves making an after-tax contribution to a traditional IRA and then converting that amount into a Roth IRA. The key difference here is the traditional IRA.
To find out if this method is right for you, check out our “Can I Make A Mega Backdoor Roth IRA Contribution?” flowchart below.
It addresses some of the most common issues that arise for someone who is interested in making a Mega Backdoor Roth IRA contribution.
This flowchart considers:
- The maximum amount that can be contributed
- The impact of the ACP test
- 401(k) plan-specific features providing in-service distributions and/or separate accounts
- The tax impact upon rollover
- The step-by-step process to complete this kind of contribution