Understanding The Mega Backdoor Roth IRA

There was a whole lot of speak these days in regards to the mega backdoor Roth IRA. For a very long time, it was an unstated secret utilized by retirement planners. Nonetheless, the IRS released guidance that particularly addressed each backdoor Roth IRA conversions, and the so-called Mega Backdoor Roth IRA. In consequence, it has gained much more reputation and curiosity.

So what’s the Mega Backdoor Roth IRA? The Mega Backdoor Roth IRA permits you to contribute an extra $47,500 into an Roth IRA by leveraging the truth that some employer 401k plans permit after-tax contributions as much as the present restrict of $72,000. 

Wait, what? I assumed the Roth contribution limit in 2026 is $7,500 (and $8,600 should you’re over 50). How will you contribute over 6x that quantity?

Let’s dive into a bit of background, after which present how the method works.

First: Why A Roth vs. Conventional vs. 401k

I believe it is vital to first have a dialogue on why this even issues. As a result of, for some individuals, it does not matter.

Who This Article Does not Apply To:

• If you happen to do not max out your 401k contributions and your IRA contributions at present (this implies placing in $24,500 pre-tax to your 401k, and $7,500 to your IRA)
• If you happen to do not meet the revenue limitations to have a deductible IRA (should you can deduct your IRA contributions, do this)
• In case your employer does not supply after-tax 401k contributions (you may nonetheless need to learn this and be within the know, but it surely will not aid you and I am sorry your employer sucks)

Why Hassle With A Roth vs. A Conventional IRA vs. A 401k

With out dragging on an extended dialog right here, now we have a tremendous article on when to contribute to a Roth IRA vs. a Traditional IRA. It is a lengthy one, but it surely goes into element in regards to the tax penalties of every. I extremely advocate you leverage that article as a foundation for this. 

However actually, tax diversification is likely one of the greatest causes to contemplate this technique. It may be profit to have the ability to make the most of each taxable and tax-free accounts in retirement. It *may* even be a profit to pay any potential taxes in the present day to take pleasure in tax-free retirement later. It actually is determined by your tax scenario, however should you’re already studying this far, you probably know that already.

Background: A Common Backdoor Roth IRA Conversion

The Backdoor Roth IRA Conversion is an oblique solution to contribute to a Roth IRA when you find yourself not eligible to contribute immediately as a consequence of excessive revenue.

Bear in mind, to have the ability to totally contribute to a Roth IRA, it’s important to meet the next revenue limits (as of 2026):

If you happen to make greater than the revenue limits, and have earned revenue, you may nonetheless contribute to a non-deductible conventional IRA. The Backdoor Roth IRA makes use of this tactic to then convert the non-deductible conventional IRA contribution right into a Roth account. 

Here is briefly the way it works in three steps.

Step 1 – Guarantee You Do not Have Any Different Pre-Tax IRA Accounts

To keep away from many complexities and potential issues, you must get rid of any conventional IRAs, SEP IRAs, or SIMPLE IRAs, except you need to convert these into Roth IRAs. You’ll be able to get rid of them by rolling them over into an employer sponsored plan, equivalent to a 401k, 403, or 457. That is referred to as a reverse IRA to 401k rollover. You’ll then be leveraging this employer sponsored plan for the Mega Backdoor Roth IRA.

Bear in mind, you can too solely rollover pre-tax cash, so any earlier non-deductible contributions usually are not eligible for this.

Step 2 – Make A Non-Deductible IRA Contribution

As soon as you’ve got eradicated all of your conventional IRA accounts, it is time to truly begin contributing to your Backdoor Roth IRA. That is the simple half. 

Merely open a Conventional IRA Account and a Roth IRA Account on the identical agency (you may have already got this). Then, contribute $7,500 (the 2026 restrict) as a non-deductible contribution to your Conventional IRA.

Step 3 – Convert The Conventional IRA To The Roth IRA

This step can also be fairly straightforward, however there are some caveats. First, you must wait at the very least in the future after the cash clears the deposit into your Conventional IRA earlier than changing it. The IRA has no tips on this, but it surely’s good to indicate a transparent step-by-step technique of the way you transformed. 

For a lot of online brokerage firms make this step fairly straightforward, however it may be scary. At most companies, you merely switch the steadiness from the Conventional IRA to the Roth IRA. That is it. Others may make you signal a type. Virtually all will warn you in regards to the tax implications of this, which is the “scary” a part of the transaction.

We’re followers of Charles Schwab as our brokerage as a result of they provide no-fee IRAs, and commission-free trades. Open a Schwab account here for free.

We’re not tax specialists, however this is a terrific information on how to report the taxes on your backdoor Roth IRA.

How The Mega Backdoor Roth IRA Works

Okay, now that you have had the refresher on the Backdoor Roth IRA, how does the Mega Backdoor Roth IRA work? Effectively, it takes benefit of the very fact the after-tax contributions to a 401k plan are handled identical to a Conventional IRA within the above instance of the Backdoor Roth. 

It is a completely different course of, however comparable. But it surely requires that you’ve got an employer 401k that permits after-tax contributions. We’re not speaking Roth contributions, however after-tax contributions.

A word on after-tax 401k contributions. Bear in mind, the IRS limits on total 401k contributions is $72,000 in 2026. Meaning that you may contribute $24,500 pre-tax, and your employer sometimes contributes one thing. Some 401k plans then permit workers to contribute the remaining quantity in after-tax contributions.

For instance, for example your employer matches you $6,000 into your 401k. You’ll be able to contribute $24,500 pre-tax, your employer places in $6,000, and that leaves you $41,500 that you may doubtlessly contribute after-tax in case your employer permits it.

Or, when you’ve got a solo 401k, you may setup your plan to permit it! That is large for small enterprise homeowners.

This Works Nice For Solo 401k House owners

Though many corporations do not permit in-service distributions and after-tax contributions, for solopreneurs which have a solo 401k, this generally is a nice choice to maximise your Roth cash.

With a solo 401k, you may solely contribute roughly 25% of your pre-tax revenue to your 401k plan. For a lot of enterprise homeowners, this will not hit the restrict of $72,000 (in 2026). Nonetheless, since you are the keeper of your personal plan, you may be certain that your plan permits after-tax contributions AND in-service withdrawals. 

So, for example you may solely contribute:

• $24,500 in elective contributions
• $24,500 in revenue sharing contributions

That solely provides as much as $49,000 in contributions. You could possibly theoretically contribute one other $23,000 in after tax contributions to your solo 401k, which you can then roll over as a mega-backdoor Roth IRA. That is large!

The trick right here is to create a plan that permits this. You can’t do these plans at any of the “free” solo 401k suppliers.

Check out the next as they need to permit it should you ask for it to be created as a part of your plan: 

• Nabers Solo 401k – Create a self-directed solo-401k with checkbook management. Learn our Nabers 401k Review.
• My Solo 401k – They will create a customized plan for $525 plus an annual charge of $125. Learn our MySolo401k Review.

Conclusion

The Mega Backdoor Roth IRA is one other potential instrument to maximise tax financial savings IF you’ve gotten extra bandwidth for financial savings. This technique is admittedly for people who find themselves maximizing their financial savings in different avenues first: 401k, IRA, HSAs, 529s.

It additionally works rather well for individuals who need to make early withdrawals from their IRA or 401k.

If you happen to nonetheless want or need extra tax sheltered financial savings, then that is doubtlessly a terrific technique in case your employer permits it.