The Money Mustache Community
Learning, Sharing, and Teaching => Taxes => Topic started by: Broadway2019 on August 07, 2017, 11:34:58 AM
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I make $125,000 a year and am maxing out my 401k. Some people have suggested looking into a Mega Back Door Roth. Can someone explain the steps to do this and the benefits in simple terms?
Also, are there any other tax things I should be doing?
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"Mega backdoor Roth":
Step 1) Contribute after-tax (not Roth) money to your 401(k).
Step 2) Roll it over to Roth IRA or 401(k).
"Backdoor Roth"
Step 1) Contribute non-deductible money to a traditional IRA.
Step 2) Roll it over to a Roth IRA.
The benefits to each of these are simple: you get to put money into a Roth IRA through this indirect method that you wouldn't be able to otherwise. This money will then grow tax-free.
There are some caveats. For the non-mega backdoor Roth to work, you need to not have any pre-tax money in any traditional IRAs. For the mega backdoor Roth to work, your employer needs to allow after-tax contributions above and beyond the standard $18k limit, and they need to allow in-service withdrawals of these contributions.
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If your stated income is gross (before taking your 401k contributions out) you should be able to contribute to a Roth IRA directly. No need to backdoor it.
Edit to clarify: If your plan will allow for the Mega Backdoor Roth and you have enough spare income to take advantage of it, I'd do that. I've never had a plan that will allow for it, however, and I'd bet most people's don't.