What is the Mega Backdoor Roth?

The Mega Backdoor Roth is a financial strategy that allows an individual to contribute additional funds to a Roth IRA, even if they are normally excluded due to income limitations. This is achieved using a process involving after-tax contributions to a 401(k) combined with in-service withdrawals that are then placed into a Roth IRA. Here's a breakdown:

1. Contribution Limits and Process:

   • You have a total annual contribution limit of around $53,000 to $54,000 for a 401(k), depending on the year.
   • Of this amount, $18,000 can be contributed as employee deferrals to a traditional 401(k), leaving potential for further contributions.
   • The remaining balance, up to the total limit (e.g., $35,000), can be made as after-tax contributions.
   • These after-tax contributions are then converted through in-service withdrawals to a Roth IRA, maintaining their tax-free status upon withdrawal in retirement.

2. Advantages:

   • Allows high-income earners to bypass income limits for Roth IRA contributions.
   • Enhances retirement savings and provides potential tax-free growth and withdrawals.

3. Requirements:

   • Your employer must offer the option for after-tax 401(k) contributions and in-service withdrawals.
   • Not all employers provide this option, and the availability and exact benefits can vary.

4. Considerations:

   • It's important to manage this process within a brief interval to minimize taxes on any gains that accrue between the after-tax contribution and the conversion to Roth IRA.

For a detailed explanation and practical use case, Brad Barrett and others discuss various aspects of this strategy, highlighting its benefits and complex nature 1 2 3.