Maximizing Your Retirement Savings with Backdoor & Mega Backdoor Roth
In last week's article, we discussed about 401k, Traditional IRA and a bit on Roth IRA accounts. But we haven't discussed how to work around the income limits on Roth IRA accounts. In this article we will discuss the following topics.
- Backdoor Roth IRA
- Mega Backdoor Roth IRA
- Differences between Roth 401(k) and separate Roth Account
Backdoor Roth IRA
A Roth IRA is funded with post tax money, but the earnings grow tax free, and you will not pay taxes during retirement. In 2025, for those married filing jointly, if the income is more than $246k, you are not eligible to contribute to Roth IRA. But the income limit doesn't apply to Roth IRA conversions. So, irrespective of your income, you can convert $7500 into your Roth IRA every year. You can contribute $7500 to tradition IRA and as soon as you have the money in traditional IRA account, convert into Roth IRA.
If you are doing this through financial institutions like fidelity, it's straightforward. You can open one traditional and one Roth IRA account online and then transfer funds to traditional IRA. As soon as the funds are available in traditional IRA, move them to Roth IRA.
Mega Backdoor Roth IRA
In 401k account, we can make post tax contributions and then do an in-plan conversion to Roth IRA. Although this doesn't create a separate Roth IRA account, that portion of the 401(k) is designated as Roth. To do this, your 401k plan should allow 2 things.
- Post tax contributions
- In-plan conversion
After making post-tax contributions, ensure the in-plan conversion is executed before the money gets invested. If you miss the in-plan conversion, then the earnings on the investments will be taxed while conversion. If you have 401k with financial institutions like Fidelity, you can setup automatic conversion of your post tax contributions to Roth 401(k).
Why is this called mega Backdoor Roth?
It's called mega because we can contribute huge amount to Roth in this method. In 2025, for individual less than 50 years, we can contribute up-to $70k to retirement accounts. This amount includes your pretax contribution, employer match, post tax contributions and any other Roth contributions. Assuming you maxed out your pretax 401k and also max funded separate Roth IRA, let's calculate how much more you can contribute using mega backdoor Roth.
- Total IRS contribution limit for all types of retirement plans: $70,000
- Minus pre-tax 401(k) contribution: $23,500
- Minus employer matching contribution: $5,000 (This is an example. Some employers do more and some do less than this number)
- Minus individual Roth IRA contribution: $7,500
- Remaining mega backdoor Roth contribution limit: $34,000
So, you can still do $34,000 to Roth 401(k) contribution using the mega backdoor Roth method.
Differences between Roth 401(k) and separate Roth Account
With respect to withdrawals, you have more flexibility in separate Roth account when compared to Roth 401(k). The Roth 401(k) money can't be withdrawn until retirement(59 and half years) without penalty. With Roth IRA, once it's 5 years old, you can withdraw your contributions without taxes and penalty. To withdraw the earnings without penalty you need to wait till the retirement.
Also, separate Roth account offers wider investment choices when compared to Roth 401(K). Check your 401k plan to see whether the Roth 401(k) can be rolled over to individual Roth account . If the 401k plan allows this, it's good idea to rollover for better investing options.
That's a wrap for this week !! Happy learning.
