The Backdoor Mega Roth Conversion is a process used to build after-tax wealth in your Roth IRA. With the small $6,000 annual limit ($7,000 catch up limit) of the Roth IRA, it is difficult for investors to reach more than $1 million in their Roth IRA account. In addition, those who make a certain amount of money can no longer contribute to a Roth IRA. If you are filing single and your modified adjusted gross income is more than $139,999.99 per year, or if you are married filing jointly and your modified adjusted gross income is more than $207,999.99 per year, you can no longer contribute to a Roth IRA. That is unless they use the backdoor option.
With the Backdoor Mega Roth IRA, you are able to contribute after-tax dollars to your Roth 401k, and then rollover that money into your Roth IRA. As of 2021, you are allowed to contribute up to $19,500 per year ($26k if over 50) in your 401k plan. This contribution limit is much higher than that of the Roth IRA. The contribution limit for a 401k is $19,500 with a total contribution of $58,000 ($64,500 if over age 50). Assuming you are maxing out your 401k at $19,500, the mega backdoor Roth allows you to put up to $38,500 of after-tax dollars in a Roth IRA.
What if the Backdoor Mega Roth Conversion goes away?
Congress has been playing around with the idea of getting rid of the Backdoor Mega Roth Conversion or limiting who can use it. Effective January 1st, 2022, you can no longer do the Backdoor Mega Roth Conversion. So what are your options? The purpose of the backdoor is to avoid paying taxes. While the Mega Conversion is gone, you can still do normal Roth conversions using your Traditional IRA. That means you can convert all of your Traditional IRA balance into a Roth IRA. Just remember that the annual contribution limit is still the same with both IRA’s combined.
Other than that, the best way to avoid or reduce taxes is to contribute to your employer-sponsored retirement plan.
- Max Out Your Pre-Tax Options – This can be a 401k, 403b, 457b, Simple IRA, or SEP IRA.
- Participate in Pension Plans, if Available.
- Open and Max Out a Health Savings Plan (HSA)
- Max Out Your Roth 401k if it is available.
- Contribute the rest to Tax-Harvested Individual Brokerage Accounts with Betterment or Wealthfront. Click on any of those links to get your first $5,000 managed free.
Obviously, donating to a charity will also help reduce your taxes. As explained by Bo in “The Money Guy Show” below, there is nothing wrong with maximizing your other options if you have the means.
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