Get Acquainted with the Mega Backdoor IRA


When individuals of a certain income level want to place some of the retirement savings into a Roth IRA they need to utilize a complicated but IRS-sanctioned method informally called a “Backdoor Roth”.

This method is a roundabout path that lets high-income taxpayers put money in a Roth.

If you are comfortable using the Backdoor Roth, and have some additional discretionary income you may be able to take advantage of what has been dubbed the “Mega Backdoor Roth”

What is a Mega Backdoor Roth?

The so-called Mega Backdoor Roth is an employer-sponsored retirement plan equivalent to the Backdoor Roth IRA. With this method there’s a possibility, in limited circumstances, to perform a transaction similar to the Back-Door Roth IRA.

Since plan contribution limits are higher than IRA contribution limits you could potentially do this with much greater dollar amounts.

Who Can Utilize a Mega Backdoor Roth?

In order for an individual to take advantage of the Mega Backdoor Roth Method, five conditions must be met –

  • The employer-sponsored retirement plan, e.g. a 401(k), must allow for after-tax contributions
  • After-tax contributions must pass the actual contribution percentage (ACP) test
  • The individual must be below the “overall limit” for plan contributions
  • Enough disposable income must be available to make after-tax contributions to the plan
  • The plan must allow for periodic in-service distributions of after-tax money and earnings

How does a Mega Backdoor Roth Work?

In September 2014, IRS Notice 2014-54 clarified the tax treatment of distributions from retirement plan funds when the plan contains both pre-tax and after-tax amounts.

Distributions from such retirement plans must be made on a pro-rata basis, but the pre-tax and after-tax portions of that distribution can be split. This split allows the pre-tax money to be rolled to a traditional IRA while the after-tax portion is converted, tax free, to a Roth IRA.

The pro-rata calculation for the distribution generally only includes funds eligible for distribution at the time.

Funds to which a participant is not currently entitled are not factored into the calculation. What this means is that a young (pre-59 ½) client can make after-tax contributions to their plan on an ongoing basis.

Periodically and before significant gains- hopefully- are realized on those amounts, they can take a distribution and have those amounts converted to a Roth IRA.

Pre-tax and/or Roth salary deferrals along with their earnings, would generally be inaccessible. Therefore, the pro-rata calculation would typically only consider after-tax funds and their respective earnings. This makes the converted funds all or mostly after-tax money.

The conversion to a Roth IRA will be virtually tax-free.

Mega Backdoor Roth Example

Let’s look at a quick example.

Let’s say I’m 40 years old and my employer offers a 401(k) that allows for after-tax contributions. I’ve been working at this same company since I graduated from Boston University.

During my twenty some years at the company I’ve made $150k pre-tax deferrals into my plan. My plan has now amassed $300,000 in total with the deferrals I made and their earnings.

I’d like to retire early so I seek the advice of one of my friends who is a financial advisor. He reviews my plan and picks up on my ability to make after-tax contributions. He tells me I can take a distribution of those amounts once per year.

In addition, my buddy tells me that with my deferrals and the corresponding match from my company, I am eligible to contribute $40k of after-tax cash to my plan.

He suggests a Mega Backdoor Roth IRA.

So, over the next few months after I meet with my friend, I contribute $40k of the after-tax funds I’m allowed to add to my 401(k) balance.

The value of the after-tax contributions, along with their earnings (pre-tax) comes to $43k and the value of my pre-tax salary deferrals and earnings is $355,000.

My total 401(k) balance is $398,000, of which just $43,000 is after-tax money.

How to Complete the Transfer

Following my friend’s advice, I then request a distribution from my plan for the funds which I am currently eligible to receive.

I am forty and therefor under age 59 ½ and still working for the company so I am unable to access my salary deferrals and earnings. The only funds I can access are my after-tax contributions and associated earnings.

So even though I have almost $400k in pre-tax money in my plan, the amount of pre-tax and after-tax money I receive as my distribution will typically be calculated based on the $40k after-tax money along with the $3k of earnings.

Now I can request to have the entire amount directly rolled over to my Roth IRA.

I will owe tax on just $3k of my $43k conversion since the rest is after-tax money. If I want to any additional tax I can request to have the $3k of pre-tax earnings moved directly to a traditional IRA. At the same time as I move the 3K, I can simultaneously convert my $40k of after-tax funds to a Roth IRA tax-free.

I can do this this year after year after year growing my Roth IRA with no additional tax cost.

Mega Roth IRA Summary

Not everyone can take advantage of a Mega Backdoor Roth but for those who can use it the wealth building effects can be quite powerful. This ideally allows an individual in retirement to choose their own tax bracket by pulling pre-tax and post-tax money strategically.

Remember the five conditions that must be present to create the Mega Backdoor Roth. Also, carefully read IRS Notice 2014-54. This will help to insure you follow correct procedure.


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