You have heard your colleagues talk about this “Mega Back Door Roth” thing? Or perhaps you read about it here on FAANG FIRE and thought it was some exotic, complicated, advanced strategy. I’m here today to tell you that it’s one of the easiest things you can do.
This is such a valuable piece. I had no idea this existed until you started posting about it. My wife works for EA, and it looks like they allow it. So many years of missed massive Roth contributions...sigh. Thank you.
Amazon has the same option as Meta via Fidelity to automatically convert to Roth without needing to call. They have the same " ROTH IN PLAN CONVERSION " section at the bottom with an option of "Convert After-tax to Roth".
Awesome! I don't know why Fidelity doesn't have this enabled for all their accounts. I don't get the incentives they have to not make it easy. I am sure there is some hidden regulatory lift that I am unaware of that causes the difference.
I just came upon this post and am trying to understand this a bit more. What is the additional 11.5k you mentioned on point (1)? My understanding is, there is a max of 23k allowed for pre-tax 401k and so, we put 11.5k while Meta/Google etc match upto 11.5k.
After this is maxed out, there is an overall max of 69k set by the IRS, so we are free to choose 69k - 23k for whichever mechanism we choose to put into (hence the 69-23 = 46k) right?
Think of it as a separate % that only applies to your work bonuses, not to normal paycheck. It isn’t required if you don’t want to fund via your bonus.
I've always resisted contributing to a retirement fund using after-tax dollars--I expect my tax bracket to be lower in retirement than it is now.
Provided I buy a stock and hold, so don't incur cap gains during the investment period, I'm also not paying tax on the investment.
Am I missing something about the benefit of a Roth in this circumstance? Perhaps the assumption is that investment accounts do more active trading of securities, and so incur cap gains every time I move from one stock to another?
The $10 you put in the after-tax would be the same $10 that go in your taxable account. So regardless of whether you choose After-Tax or Taxable, you pay the tax. Now, the benefit of the After-Tax (once it gets into the Roth) you never pay any additional taxes on that ever. While the Taxable account will see you paying taxes on dividends and on the capital gains when you eventually sell the underlying assets.
So I would lean prioritizing that after-tax account as much as you can if you have the excess savings and it is for the long term.
Hi Andre - This is super helpful! Quick question. If I only have the ability to put in $23K for the 401K, would you suggest putting it into the traditional pre-tax 401K or Roth 401K? Leaning towards the later since not having the deduction won't change my tax bracket and I can let it grow without having to pay any future tax on the gains.
There are lots of different factors at play when deciding the split on pre/roth. If I was in a state without income taxes and early career leaning into Roth 401k wouldn't be a bad idea. It probably would end up as wash one way or the other. Not worth overthinking too much. Again, lots of variables.
Hi Steven - I know I'm late to the game here since you asked this two months ago but wanted to chime in anyway if it would help. Generally speaking it makes more sense to make the pre-tax 401k contribution and take the deduction if you're a high earner. Even if it won't change your marginal tax bracket, you'll still benefit from the deduction.
For instance, if you're in the 35% tax bracket, contributing $23,000 to the pre-tax 401k reduces your taxable income by that amount, all else equal (even though you're still in the 35% bracket), meaning you pay $23,000 x 35% = $8,050 less in fed tax. Getting money into a Roth when you otherwise couldn't (due to high income) is nice, but when the trade-off is not getting the 401k deduction, you're "paying" tax at your current marginal rate to get the money into the Roth now. As a high earner, there's less of a chance you'll be in a higher bracket when you ultimately withdraw the Roth money in retirement, since you're contributing at the 35% bracket (in this example).
If I start a business that barely makes any money (ex $3500 the first year) can I still open a Solo 401K that allows after-tax contributions and max out after-tax contributions 69K ? Even though the business only made $3500, I can still put 69K into the after-tax Solo 401K ??? If so, I'm about to open up a business :)
You can only contribute the after tax proceeds (or something to that effect). I only contribute after I have started my taxes so I know how much I can contribute. I wish you could just blast in $69k.
That's such a bummer. My other deep dive right now is about my next house hack. I want to provide 'substantial services' to long-term tenants to get that income reported on schedule C and hopefully unlock all my passive real estate losses and make them active lol. I'm like 7 hours into that right now haha
Way past that lol. I'm going to try and pay for some RE tax consultations with the right CPA's soon. But if I can just have one STR bedroom in my home, and then have all the rest of my real estate recharacterized as active lol.... suddenly it's worth it. I geek out on this stuff. Thanks for responding! And great article
I'm referring to the withdraw of contributions. A couple of questions in different scenarios:
1. Can I withdraw the contributions from a Roth 401K or Roth IRA at any time? What are the any rules/limitations I need to follow?
2. In the case I convert from after-tax 401K to Roth IRA every quarter, for example 10K originally contributions + 2K growth over the quarter, what would be considered as the contribution vs. growth in the Roth IRA account? Would the contribution be still 10K, or would it be everything I converted (10K + 2K after tax) ?
1. My understanding is that you can withdraw Roth Contributions (401k or IRA) at anytime tax and penalty free. There is a separate 5 year wait that would apply to Roth Conversions (applies to normal backdoor roth contributions).
2. The contribution would be the $10k (the conversion is a separate process that doesn't count towards any limits). If the balance grew from $10k to $12k prior to the conversion, the $2k growth would be taxed.
Hey Andre - I had started Mega backdoor after your post at Meta several years ago I think. The question I have always had is where would I see the breakdown of the % after tax on Fidelity? Does this basically get reflected in the overall 401k contribution? And, therfore is the idea that any capital gains on this would be tax free?
Thanks for the informative write-ups and recommendations!
Log into Netbenefits. Click into your company account.
You should see a module that says "Sources". At the bottom there is a "Show Details" button. If you click on that, you should be able to see everything broken out.
Two options to make it easier in the future: You could change the investments for just the After-Tax funds. So you know all investments of a certain type were Roth in nature. Or you can also roll the funds into a separate Roth IRA. This latter is what I have done, just so I could easily know balances by account type at the account level vs needing to dig deeper.
Assuming Meta/Google based on the match. If you needed to prioritize, You are thinking about it in the same way I think about it.
1. Get the Full Match. 2. Max out the rest of the pre-tax limit. 3. Then MBDR. After that I would do 4. Back Door Roth, 5. Taxable brokerage. All of this can vary by individual circumstances, goals, and all that fun stuff.
It sounds like it's only worth contributing to Pre-Tax and After-Tax and to stick with those 2 elections. What about the Roth election? Is that where Step 4 for Back Door Roth comes in?
Is there a way back to contributing to a MBDR if I've rolled a 401k into an IRA (and a Roth IRA) from previous employers?
Yes. No issues. That only becomes an issue with the normal back door Roth, not mbdr.
Thank you for explaining this! I just started contributing (a small % for now) to the after-tax contributions!
This is such a valuable piece. I had no idea this existed until you started posting about it. My wife works for EA, and it looks like they allow it. So many years of missed massive Roth contributions...sigh. Thank you.
Great stuff, thanks! Just shared inside Meta.
Amazon has the same option as Meta via Fidelity to automatically convert to Roth without needing to call. They have the same " ROTH IN PLAN CONVERSION " section at the bottom with an option of "Convert After-tax to Roth".
Awesome! I don't know why Fidelity doesn't have this enabled for all their accounts. I don't get the incentives they have to not make it easy. I am sure there is some hidden regulatory lift that I am unaware of that causes the difference.
I just came upon this post and am trying to understand this a bit more. What is the additional 11.5k you mentioned on point (1)? My understanding is, there is a max of 23k allowed for pre-tax 401k and so, we put 11.5k while Meta/Google etc match upto 11.5k.
After this is maxed out, there is an overall max of 69k set by the IRS, so we are free to choose 69k - 23k for whichever mechanism we choose to put into (hence the 69-23 = 46k) right?
You are missing one piece! The $23k does not include the company match.
What is After-Tax Bonus Election and is any % required there to properly set up a mega backdoor roth?
Think of it as a separate % that only applies to your work bonuses, not to normal paycheck. It isn’t required if you don’t want to fund via your bonus.
I've always resisted contributing to a retirement fund using after-tax dollars--I expect my tax bracket to be lower in retirement than it is now.
Provided I buy a stock and hold, so don't incur cap gains during the investment period, I'm also not paying tax on the investment.
Am I missing something about the benefit of a Roth in this circumstance? Perhaps the assumption is that investment accounts do more active trading of securities, and so incur cap gains every time I move from one stock to another?
I think you might be missing a piece.
The $10 you put in the after-tax would be the same $10 that go in your taxable account. So regardless of whether you choose After-Tax or Taxable, you pay the tax. Now, the benefit of the After-Tax (once it gets into the Roth) you never pay any additional taxes on that ever. While the Taxable account will see you paying taxes on dividends and on the capital gains when you eventually sell the underlying assets.
So I would lean prioritizing that after-tax account as much as you can if you have the excess savings and it is for the long term.
Thanks for the perspective!
Hi Andre - This is super helpful! Quick question. If I only have the ability to put in $23K for the 401K, would you suggest putting it into the traditional pre-tax 401K or Roth 401K? Leaning towards the later since not having the deduction won't change my tax bracket and I can let it grow without having to pay any future tax on the gains.
There are lots of different factors at play when deciding the split on pre/roth. If I was in a state without income taxes and early career leaning into Roth 401k wouldn't be a bad idea. It probably would end up as wash one way or the other. Not worth overthinking too much. Again, lots of variables.
Hi Steven - I know I'm late to the game here since you asked this two months ago but wanted to chime in anyway if it would help. Generally speaking it makes more sense to make the pre-tax 401k contribution and take the deduction if you're a high earner. Even if it won't change your marginal tax bracket, you'll still benefit from the deduction.
For instance, if you're in the 35% tax bracket, contributing $23,000 to the pre-tax 401k reduces your taxable income by that amount, all else equal (even though you're still in the 35% bracket), meaning you pay $23,000 x 35% = $8,050 less in fed tax. Getting money into a Roth when you otherwise couldn't (due to high income) is nice, but when the trade-off is not getting the 401k deduction, you're "paying" tax at your current marginal rate to get the money into the Roth now. As a high earner, there's less of a chance you'll be in a higher bracket when you ultimately withdraw the Roth money in retirement, since you're contributing at the 35% bracket (in this example).
If I start a business that barely makes any money (ex $3500 the first year) can I still open a Solo 401K that allows after-tax contributions and max out after-tax contributions 69K ? Even though the business only made $3500, I can still put 69K into the after-tax Solo 401K ??? If so, I'm about to open up a business :)
You can only contribute the after tax proceeds (or something to that effect). I only contribute after I have started my taxes so I know how much I can contribute. I wish you could just blast in $69k.
That's such a bummer. My other deep dive right now is about my next house hack. I want to provide 'substantial services' to long-term tenants to get that income reported on schedule C and hopefully unlock all my passive real estate losses and make them active lol. I'm like 7 hours into that right now haha
You are an hour away from getting sucked into the short term rental loophole gurus.
Way past that lol. I'm going to try and pay for some RE tax consultations with the right CPA's soon. But if I can just have one STR bedroom in my home, and then have all the rest of my real estate recharacterized as active lol.... suddenly it's worth it. I geek out on this stuff. Thanks for responding! And great article
Can you please also talk about the withdraw of Roth IRA? That part is always confusing.
Can you explain what you are referring to when you mention “withdraw”?
Thanks for the fast response!
I'm referring to the withdraw of contributions. A couple of questions in different scenarios:
1. Can I withdraw the contributions from a Roth 401K or Roth IRA at any time? What are the any rules/limitations I need to follow?
2. In the case I convert from after-tax 401K to Roth IRA every quarter, for example 10K originally contributions + 2K growth over the quarter, what would be considered as the contribution vs. growth in the Roth IRA account? Would the contribution be still 10K, or would it be everything I converted (10K + 2K after tax) ?
Thank you!
1. My understanding is that you can withdraw Roth Contributions (401k or IRA) at anytime tax and penalty free. There is a separate 5 year wait that would apply to Roth Conversions (applies to normal backdoor roth contributions).
2. The contribution would be the $10k (the conversion is a separate process that doesn't count towards any limits). If the balance grew from $10k to $12k prior to the conversion, the $2k growth would be taxed.
Hey Andre - I had started Mega backdoor after your post at Meta several years ago I think. The question I have always had is where would I see the breakdown of the % after tax on Fidelity? Does this basically get reflected in the overall 401k contribution? And, therfore is the idea that any capital gains on this would be tax free?
Thanks for the informative write-ups and recommendations!
Fidelity doesn't make it simple!
Log into Netbenefits. Click into your company account.
You should see a module that says "Sources". At the bottom there is a "Show Details" button. If you click on that, you should be able to see everything broken out.
Two options to make it easier in the future: You could change the investments for just the After-Tax funds. So you know all investments of a certain type were Roth in nature. Or you can also roll the funds into a separate Roth IRA. This latter is what I have done, just so I could easily know balances by account type at the account level vs needing to dig deeper.
I see. Thanks Andre!
Ok, so just starting out, so need a step back of clarity on total retirement contributions.
Order of contributions:
1. Max out 401k
*401K - $11.5K (minimum of company match)
*401K - another $11.5K not matched by company
*$34K via MBDR
2. Whatever contributions/investments you do after.
Assuming Meta/Google based on the match. If you needed to prioritize, You are thinking about it in the same way I think about it.
1. Get the Full Match. 2. Max out the rest of the pre-tax limit. 3. Then MBDR. After that I would do 4. Back Door Roth, 5. Taxable brokerage. All of this can vary by individual circumstances, goals, and all that fun stuff.
It sounds like it's only worth contributing to Pre-Tax and After-Tax and to stick with those 2 elections. What about the Roth election? Is that where Step 4 for Back Door Roth comes in?