Understanding The Mega Backdoor Roth IRA

People have been talking a lot about the mega backdoor Roth IRA lately. Retirement planners kept it a secret for a long time. The IRS did, however, put out information that was specifically about backdoor Roth IRA conversions and the so-called Mega Backdoor Roth IRA. Because of this, it has become even more popular and interesting. Understanding The Mega Backdoor Roth IRA

So, what is the Mega Backdoor Roth IRA? You can put an extra $47,500 into a Roth IRA with the Mega Backdoor Roth IRA. This is possible because some employer 401k plans let you make after-tax contributions up to the current limit of $72,000.

Huh? I thought that in 2026, the maximum Roth contribution would be $7,500, or $8,600 if you are over 50. How can you give more than six times that? Understanding The Mega Backdoor Roth IRA

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

I think it’s important to first have a discussion on why this even matters. Because, for some people, it doesn’t matter.

Who This Article Doesn’t Apply To:

• If you don’t max out your 401k contributions and your IRA contributions currently (this means putting in $24,500 pre-tax to your 401k, and $7,500 to your IRA)
• If you don’t meet the income limitations to have a deductible IRA (if you can deduct your IRA contributions, do that)
• If your employer doesn’t offer after-tax 401k contributions (you might still want to read this and be in the know, but it won’t help you, and I’m sorry your employer sucks)

If you make more than the income limits and have earned income, you can still contribute to a non-deductible traditional IRA. The Backdoor Roth IRA uses this tactic to then convert the non-deductible traditional IRA contribution into a Roth account. Understanding The Mega Backdoor Roth IRA

Here’s briefly how it works in three steps.

Step 1 – Ensure You Don’t Have Any Other Pre-Tax IRA Accounts

To avoid many complexities and potential problems, you should eliminate any traditional IRAs, SEP IRAs, or SIMPLE IRAs, unless you are looking to convert those into Roth IRAs. You can eliminate them by rolling them over into an employer-sponsored plan, such as a 401k, 403, or 457. This is called a reverse IRA to 401k rollover. You will then be leveraging this employer-sponsored plan for the Mega Backdoor Roth IRA. Understanding The Mega Backdoor Roth IRA

Remember, you can also only rollover pre-tax money, so any previous non-deductible contributions are not eligible for this.

Once you’ve eliminated all your traditional IRA accounts, it’s time to actually start contributing to your Backdoor Roth IRA. This is the easy part.

Simply open a Traditional IRA Account and a Roth IRA Account at the same firm (you might already have this). Then, contribute $7,500 (the 2026 limit) as a non-deductible contribution to your Traditional IRA.

Step 3 – Convert The Traditional IRA To The Roth IRA

This step is also pretty easy, but there are some caveats. First, you should wait at least one day after the money clears the deposit into your Traditional IRA before converting it. The IRA has no guidelines on this, but it’s good to show a clear step-by-step process of how you converted. Understanding The Mega Backdoor Roth IRA

For many online broking firms make this step pretty easy, but it can be scary. At most firms, you simply transfer the balance from the Traditional IRA to the Roth IRA. That’s it. Others might make you sign a form. Almost all will warn you about the tax implications of this, which is the “scary” part of the transaction.

We’re fans of Charles Schwab as our broking because they offer no-fee IRAs and commission-free trades. Open a Schwab account here for free.

We’re not tax experts, but here’s a great guide on how to report the taxes on your backdoor Roth IRA. Understanding The Mega Backdoor Roth IRA

How The Mega Backdoor Roth IRA Works

Okay, now that you’ve had the refresher on the Backdoor Roth IRA, how does the Mega Backdoor Roth IRA work? Well, it takes advantage of the fact that after-tax contributions to a 401k plan are treated just like a Traditional IRA in the above example of the Backdoor Roth. Understanding The Mega Backdoor Roth IRA

In order to do a Mega Backdoor Roth IRA, your 401k plan needs to offer the following:

• After-Tax Contributions Above and Beyond the $24,500 Pre-Tax Contribution Limits
• In Service Distributions Or Non-Hardship Withdrawals

If your 401k plan doesn’t offer non-hardship in service withdrawals, you might still be able to accomplish the same thing if you’re leaving your company soon.

And there are also thoughts that even if you can’t do in-service withdrawals, it still might be very worthwhile. Understanding The Mega Backdoor Roth IRA

You can then max out your 401k with after-tax contributions up to the contribution limit each year. You can then withdraw that money into a Traditional IRA, and do the same process as a Backdoor Roth IRA.

Sadly, a company that allows both after-tax contributions and in-service distributions is rare. Check with your benefits manager before you proceed. Understanding The Mega Backdoor Roth IRA

1. Maximize Your After-Tax 401k Contributions
   The first additional step for the Mega Backdoor Roth IRA is that you need to figure out how much to contribute to maximize your after-tax 401k contributions.This means understanding your employer’s plan and then making the additional contributions. This can be a challenge because many plans require you to specify a percentage of your pay cheque versus a set amount. You also want to make sure that these contributions are AFTER-TAX, NOT Roth 401k contributions. Understanding The Mega Backdoor Roth IRA
2. Withdraw The After-Tax Portion To A Roth IRA
   Once you’ve maxed out your after-tax contribution, you can withdraw that portion to a Roth IRA if your employer allows in-service non-hardship withdrawals.Otherwise, you need to wait until termination, and you can roll over the after-tax portion into a Roth IRA. The downside to waiting is that any growth from After Tax contributions becomes part of the Pre Tax balance (unlike Roth dollars).

   Note: If you have any earnings on the after-tax portion, that amount is taxable on the transfer (since it was tax-free growth in your 401k). However, if you’re doing the transfers regularly, the earnings should be minimal. Understanding The Mega Backdoor Roth IRA

   If you have excessive earnings, you should transfer the contributions to a Roth IRA and the earnings to a traditional IRA. Keep accurate records.