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A deep dive into "backdoor" Roth contributions Thumbnail

A deep dive into "backdoor" Roth contributions

If you make too much money to directly contribute money to a Roth IRA, you might still be able to indirectly contribute via the “backdoor.” And if you’re wondering whether a name like backdoor implies the process is sneaky or otherwise needs to be done in secret, don’t worry; it’s all legit. I explain why toward the end of this.

Additionally, the backdoor Roth contribution doesn’t apply only to Roth IRAs. It can also apply in the context of Roth employer plans like Roth 401(k)’s. Furthermore, when an employer plan is involved, it’s often referred to as a MEGA backdoor Roth contribution. I’ll expand on that later as well.

First, I should start with recapping the basics of traditional IRAs, Roth IRAs and Roth conversions, as that will provide important info belying the backdoor process.

 

Traditional IRA

A traditional IRA is a type of investment account that has special tax characteristics. Specifically, money contributed to a traditional IRA is often eligible to be done on a tax-deferred basis. Meaning the amount of money you put into it can reduce your taxable income that year by the amount of the contribution. And then when the money is invested inside the IRA, all the eventual growth and gains within the account aren’t taxable to you when they occur. Instead, they’re also tax-deferred. You’re not taxed until you eventually take money out of the account, at which point everything you take out is taxed as ordinary income in the year you take it out.

With an IRA, unlike with normal brokerage accounts, there is no concept of long-term vs short-term capital gains or qualified vs ordinary dividends, where certain types of gains or dividends are taxed at lower rates than ordinary income tax rates. With IRA distributions, whenever taking out any money that’s thus far been tax-deferred, everything taken out is simply taxable as ordinary income at the time.

There are some criteria that need to be met to contribute to an IRA. Specifically, the account owner needs to have earned income from either wages or self-employment.

And there are maximum annual contribution limits, too. For 2026, you can’t contribute more than $7,500 if you’re younger than 50 as of December 31, 2026. Or, if you’ll be 50 or older as of December 31, 2026, you can contribute up to $8,600 for the year.

Additionally, you can’t contribute more than the amount of your earned income for the year. For example, if you end up working for only a very limited basis in 2026 and have total gross wages of $4,000, you can’t contribute more than $4,000 to an IRA for 2026, even though that’s less than the maximum annual contribution limit.

There is a potential exception to the above though, and it’s often referred to as a “spousal” IRA contribution. Even if you don’t have much, if any, earned income of your own, if you’re married and file a joint tax return you can ultimately look to your spouse’s earned income for the year and in effect treat it as your own for purposes of being able to contribute to an IRA.

Another important thing to know about IRA contributions is that contributions can potentially be made not only on a tax-deferred basis, but also on an after-tax basis.

Let’s start with an example of a tax-deferred, or pre-tax, contribution. Assume you’ll have $60,000 of total gross wages for the year. And you’ll have no other income. If you make a $7,500 IRA contribution, your gross income on your tax return will only be $60,000 - $7,500 = $52,500. That’s what I mean when I say the contribution “tax-deferred.” You’re not getting rid of the tax on the $7,500 you contributed. Instead, you’re simply choosing to defer the recognition of tax on that money until you eventually take it out of the IRA at a later point in time. That’s why traditional IRAs are often referred to as pre-tax; because the money in them often has not yet been taxed. And that includes any gains or growth inside the account, like I mentioned above.

However, not all contributions to an IRA are able to be made on a tax-deferred basis. Specifically, there are gross income limitations on the ability to defer taxes on the contribution. In other words, if your gross income for the year is beyond a certain level, you don’t get any current year tax break or deferral on the contribution.

I won’t get into the actual income limits as there are a few of them that could apply based on whether you’re single or married, and whether you and/or your spouse have access to an employer-based retirement plan like a 401(k).

But for now, let’s pretend your gross income for the year is higher than your relevant income limit such that you can’t defer taxes on your contribution. Assume you’re single and your gross income for the year is $200,000, and you have access to a 401(k) at your employer. You won’t be able to deduct a contribution to an IRA. You’re still able to make a contribution since you have earned income. But you can’t get a current year deduction on it.

Let’s assume you make a $7,500 contribution to your IRA. Your gross income on your tax return will be $200,000. Unlike before, you can’t deduct your IRA contribution. As a result, the $7,500 you contribute to your IRA is NOT tax-deferred. Instead, the $7,500 is considered a “after-tax” contribution. After-tax contributions are also known as “basis.”

When you have basis in your IRA, you won’t be taxed again on that money when you take it out. You only have to pay tax on that money once, and you already paid tax on it before you put it into your IRA.

However, any growth on that money inside your IRA will be tax-deferred and rightfully taxed whenever you eventually take it out. As an example, assume you contribute $7,500 to your IRA on an after-tax basis. And then assume that money grows to $8,500. If you take out all $8,500, you’ll have to pay tax on only $1,000 of it; the other $7,500 will be a tax-free return of your already taxed basis.

For purposes of this newsletter, I won’t get into all the various rules and restrictions around taking money out of IRAs. But just know that, generally speaking, you can’t take money out of an IRA prior to 59 ½ without paying a 10% penalty on the amount of tax-deferred money distributed. And that’s on top of obviously having to pay income tax on any tax-deferred money taken out. However, any after-tax money distributed is not subject to the 10% early withdrawal penalty or tax.

Okay, that’s enough of a primer on traditional IRAs for now. Let’s now talk about Roth IRAs.

 

Roth IRA

A Roth IRA is ultimately an IRA in the eyes of the IRS in that. Or at least it’s built on the IRA chassis. Both flavors or IRA fall under a lot of the same sections of the tax code. However, the Roth version has a very important difference in tax characteristics.

You can loosely think of a Roth IRA as the opposite tax treatment of a traditional IRA. Whereas with a traditional IRA you can often get a break on taxes upfront but then must pay taxes on the back end when you take money out, a Roth IRA is the opposite. You do NOT get any sort of upfront tax break or tax deferral on amounts contributed to a Roth IRA. However, the payoff is that all the money you eventually take out of a Roth IRA – including all the growth and gains that occurred in the account along the way - can potentially be completely tax-free, assuming you meet a few qualifying conditions.

The rules around Roth IRA distributions are complicated and convoluted, so I won’t detail them all here. But the most common set of criteria in being able to have all your Roth IRA distributions be tax-free and penalty-free is that you’re at least 59 ½ AND your first Roth IRA was funded at least five years ago.

Because a Roth IRA is ultimately just a variant of an IRA, it shares the same maximum annual contribution limits as an IRA. For 2026, you can contribute up to $7,500 in a Roth IRA if you’re under 50 by the end of the year, or up to $8,600 if you’ll be 50 or older as of the end of the year.

Additionally, the $7,500 (or $8,600) maximum annual contribution is shared between traditional IRAs and Roth IRAs. In other words, if you have both an IRA and a Roth IRA, you can’t put $7,500 (or $8,600) into both. You can only put in $7,500 (or $8,600) combined between the two.

Like with a traditional IRA, being able to contribute to a Roth IRA requires you to have earned income from wages or self-employment. And again, like with a traditional IRA, you can’t contribute more than the amount of your earned income for the year. Like before, if you only have $4,000 in earnings for all of 2026, you can’t contribute more than $4,000 to a Roth IRA for the year. And also like with a traditional IRA, there is an exception for married folks using the “spousal” Roth IRA contribution rules.

One major difference between traditional IRAs and Roth IRAs is that Roth IRAs have income limits around being eligible to contribute at all, whereas traditional IRAs have income limits simply around being able to defer taxes on your contribution; the income limits pertaining to traditional IRAs don’t prevent you from being able to contribute at all. In other words, you can make a traditional IRA contribution regardless how high your income is, but you might not be able to take a current year tax deduction on it. But with a Roth IRA, if your total income is beyond a certain level, you flat out can’t contribute directly to a Roth IRA.

For 2026, if you’re single, you can’t directly make a Roth IRA contribution if your gross income is more than $168,000. You can contribute up to the full maximum annual contribution if your gross income is less than $153,000. And if your gross income is in between those amounts, the maximum annual contribution is reduced on a prorated linear basis.

If you’re married and file a joint tax return, the 2026 income limits around Roth IRA contribution eligibility are $242,000 and $252,000 (i.e. if your income is less than $242,000, you and your spouse can contribute up to the maximum annual contribution limits; if your income is more than $252,000, neither you nor your spouse can directly contribute to a Roth IRA; and if your income is in between, your maximum annual contribution amount is linearly prorated).

And technically, the measure of income used to determine your eligibility to contribute to a Roth IRA is a Modified Adjusted Gross Income, or MAGI. Specifically, this definition of MAGI is:

  • Your Adjusted Gross Income (“AGI”) from line 11 of your tax return
  • MINUS any Roth IRA conversions included in AGI
  • PLUS any traditional IRA contributions deducted from AGI
  • PLUS any student loan interest deductions from AGI
  • PLUS any foreign earned income and/or housing deductions from AGI
  • PLUS any foreign housing deductions from AGI
  • PLUS any qualified savings bond interest deductions from AGI
  • PLUS any employer-provided adoption benefits deducted from AGI

 

Roth conversions

A Roth conversion is when you transfer money from a traditional pre-tax account to a Roth account. For now, I’ll assume both are IRAs. So then a Roth conversion in that context would be when you transfer money from a traditional IRA to a Roth IRA. But a Roth conversion can also happen within an employer plan such as a 401(k). Which means it would be transferring money from the non-Roth portion of the account to the Roth portion.

While I’ve called a Roth conversion a “transfer” of money from a pre-tax account to a Roth account, it’s technically a distribution. However, it’s a form of distribution that’s not subject to the 10% early withdrawal penalty I mentioned above.

Which means anyone, of any age, can do a Roth conversion without the 10% penalty. Whereas you generally can’t do an actual outright distribution from a pre-tax IRA without the penalty unless you’re at least 59 ½.

Additionally, there are no income limits around being able to do Roth conversions. And you don’t need to have earned income to do a Roth conversion. Because a conversion isn’t a contribution to a Roth IRA; it’s effectively just a transfer of money from a traditional IRA to a Roth IRA. With that said, regardless of your age, and regardless of your income, you can do a Roth conversion from a traditional IRA to a Roth IRA (obviously assuming you have money in a traditional IRA. If you don’t, then there’s nothing to convert anyway!)

And there are no limits on how big or how little of a conversion you can do. The only hard limit on how much you can convert is how much money you have in your pre-tax accounts; you obviously can’t convert money that’s not there in the first place!

To the extent you’re converting pre-tax money from a traditional IRA to a Roth IRA, the conversion will be taxable as ordinary income in the year of the conversion. Recall that traditional IRAs generally contain money that has not yet been taxed. And Roth IRAs only contain money that has already been taxed. Or at least, all the money that goes into a Roth IRA – whether via direct contribution or via conversion from a tradition IRA – needs to have already been taxed. But the earnings on money within a Roth IRA aren’t taxed. Or at least, they won’t ultimately be taxed if you wait to take them out until you meet the qualifying withdrawal conditions I mentioned before. Otherwise, if you prematurely take earnings out of a Roth IRA, they could be subject to not only income tax but also a 10% early withdrawal penalty (if you’re under 59 ½ at the time of the withdrawal).

Conversely, if you’re converting after-tax money from a traditional IRA to a Roth IRA, the conversion won’t be taxable, as you’ve already paid tax on the money that went into the IRA (again, that’s why such contributions are called “after-tax,” or “basis”).

Okay, I think that’s enough background info on IRAs, Roth IRAs and Roth conversions for now.  Onto the “backdoor” Roth IRA contribution.

 

Backdoor contributions

By now you know that you can contribute into a Roth IRA so long as you have earned income AND your MAGI is below your relevant limit. But what happens if your MAGI is too high and you therefore can’t directly make a Roth IRA contribution? Well, you can potentially indirectly contribute to a Roth IRA through what’s since been called the “backdoor.”

The backdoor is simply the process of 1) making a non-deductible contribution to a traditional IRA and then 2) converting that amount as quickly as possible to a Roth IRA.

Recall from above that anyone with earned income can make an after-tax/non-deductible contribution to a traditional IRA. And also recall that anyone, regardless of age or income, can do a conversion from a traditional IRA to a Roth IRA. Therefore, you can indirectly contribute money to a Roth IRA by first contributing to an IRA and then converting it to a Roth IRA. The extra step(s) of first contributing to the traditional IRA and then converting it to the Roth is what’s collectively called the “backdoor.”

For example, assume you make an after-tax contribution of $7,500 to your IRA and then you immediately convert $7,500 from your IRA to your Roth IRA. The result is you just got $7,500 into your Roth IRA. So it ends up looking and feeling like you contributed $7,500 to your Roth IRA, but you did so with a little more work than directly contributing to it. But it’s not always so clean or simple, particularly if you have any other money in any IRA. Read on…

 

Beware of the Prorata Rule

The basic example I just walked through is a textbook example of a clean backdoor Roth IRA contribution. I say “clean” because the assumption was you had zero other money in any  IRA besides the $7,500 you contributed on an after-tax basis and then quickly converted out to your Roth IRA.

But what happens if you did actually have other money in an IRA? Then you need to pay attention to something generically called the “Prorata Rule,” as it will monkey up the taxability of your conversion.

Again looking at my clean little textbook example above, there was no tax on the conversion step of the backdoor contribution. That’s because the $7,500 you first contributed to the traditional IRA was already taxed. Therefore, you’re not taxed again when you convert that to your Roth IRA. Done.

But what if you had other money in your IRA, and it was all pre-tax? Such as money you rolled over from a previous employer’s pre-tax 401(k). Let’s look at how that would work.

Assume you have $92,500 of pre-tax money in your IRA before doing this whole backdoor thing. And then you decide you want to do a backdoor Roth IRA contribution because you want more money in Roth accounts, but your income is too high to directly contribute $7,500 to your Roth IRA. So you make an after-tax contribution of $7,500 to your IRA. You now have $100,000 in your IRA; the $92,500 that was already there, plus the $7,500 you just contributed. And then you turn around and do a $7,500 conversion of money from your traditional IRA to your Roth IRA. And you assume you’re converting just the $7,500 of after-tax money you recently contributed, so that conversion should NOT be taxable (because that $7,500 was already taxed prior to putting it in your IRA). But that’s not the case…

Unfortunately, you can’t pick and choose which specific money you convert from your IRA to your Roth IRA; you can’t choose to convert just after-tax money or just pre-tax money. Any money you convert will be a prorated mix of the total money in your IRA. In this example, you have $92,500 of pre-tax money and $7,500 of after-tax money in your IRA. Or alternatively, 92.5% of the $100,000 in your IRA is pre-tax and 7.5% of it is after-tax. The Prorata Rule is such that any conversion you do will be treated as 92.5% of the money converted is pre-tax and only 7.5% of the money converted is after-tax. Which means, if you convert $7,500, 92.5% of it (or $6,937.50) will be taxable and only 7.5% of it (or $562.50) will be non-taxable. That is most likely NOT the outcome you were expecting, as you were probably assuming all $7,500 of conversion would be tax-free. Boo.

To further complicate things, the proration of taxable vs non-taxable money doesn’t look to your IRA balances as of the date you do the conversion. Instead, it looks to your IRA balances as of December 31st of the year of the conversion.

Here’s an example of what I mean. Assume the IRA balances I mentioned above are as of now, February 2026. You have $92,500 of pre-tax money in your IRA and then you put in the $7,500 after-tax contribution. You have $100,000 in your IRA now. And now you do the $7,500 conversion as part of your backdoor Roth IRA contribution. That brings your IRA back down to a balance of $92,500.

But now let’s assume the $92,500 left in your IRA is invested really aggressively and that money roughly doubles before the end of this year. So that as of December 31, 2026, your IRA balance is $180,000, all of which is pre-tax.

When you go do to your taxes for 2026, you’ll have to fill out and include IRS Form 8606 in your tax return. Form 8606 does a few things. But its main relevance to this topic is that its what calculates the proration of taxable vs non-taxable for the $7,500 conversion you did.

I highly recommend walking through 8606 line-by-line to better understand how it works. Once you get a solid grasp of the Form, it really makes the whole Prorata Rule thing come to life and easier to see and understand. But for now, I’ll just tell you how it would treat our example above.

The Form will make you report your IRA balances as of December 31, 2026. In our case, that’s going to be $180,000. And it will make you add to that the total dollar amount of any conversions you did during the year. In our case, that’s $7,500. So then it will say, prior to accounting for any conversions, you had a total of $180,000 + $7,500 = $187,500 of IRA balances for the year.

It will also ask what after-tax contributions, if any, you made during the year. And what after-tax money, if any, you already had in your IRA(s) prior to making any additional contributions. The sum of those two things is your total after-tax “basis” in your IRA(s) for the year. In our example, your only basis was the $7,500 of after-tax contribution you made for the year.

The Form then calculates the proration of pre-tax vs after-tax for the conversion. Specifically, it will look to your total adjusted pre-conversion IRA balance of $187,500 mentioned above. And it knows that $7,500 of it was after-tax (i.e. the $7,500 contribution you made). Which means $7,500 out of $187,500, or 4.0%, of your total IRA balance was after-tax. The remaining 96.0% was therefore pre-tax.

As such, every dollar you converted was assumed to be a conversion of 96.0% pre-tax money, and 4.0% after-tax money. Which means out of the $7,500 total conversion, $7,200 will be taxable and only $300 will be non-taxable. That’s the Prorata Rule in action.

As you can see, it’s not that you CAN’T do a backdoor Roth IRA contribution if you have pre-tax money in any IRA. But you’re not going to be able to convert just the after-tax portion of your IRA balance (i.e. you can’t convert just the $7,500 after-tax contribution you made, in our example). Which means the tax implications of the conversion step of the backdoor contribution process might not be what you were expecting or hoping for.

You might have picked up on the fact that it’s your December 31st IRA balance(s) that matter. It’s not just your IRA balances at the time of the conversion that matters. That’s important to know.

For example, again assume you do this backdoor contribution process in February 2026. At the time, you have zero other money in any IRA. So far, so good; it looks like your backdoor Roth IRA contribution will be clean with no adverse tax impacts.

But then later in the year, let’s assume you decide to roll over a $1,000,000 pre-tax 401(k) from a former employer to an IRA. When it comes to file your 2026 tax return and do the Form 8606 for the year, it’s going to look at what your IRA balances were as of December 31; not in February when you did the conversion. As such, the $7,500 conversion you did as part of the backdoor Roth IRA contribution will be nearly 100% taxable due to the Prorata Rule factoring in the million dollars of pre-tax money in your IRA as of the end of the year.

And also know that Form 8606 looks at the balances of any and all IRAs you have as of December 31st. Not just normal IRAs, but also SEP IRAs and SIMPLE IRAs. All of your IRA balances are aggregated together to functionally look and act like one big fat IRA for purposes of Form 8606 and the Prorata Rule. It doesn’t matter if you do the IRA contribution into an IRA that has nothing in it, and then you convert all of that to your Roth IRA. If you have another IRA that has pre-tax money in it, those two IRAs will functionally be treated as one for purposes of filling out Form 8606 and the Prorata Rule.

But note that inherited IRAs do NOT get aggregated with your own IRAs. As such, any pre-tax balances you might have in inherited IRAs that originally belonged to another person (i.e. the decedent) will not impact the prorata calculation of your own IRAs. Though if you are the surviving spouse of the decedent and you opted to roll his or her IRA into your own (as opposed to keeping it as its own inherited IRA), then that account WILL get aggregated with your other IRAs, as it's ultimately your own IRA at that point with no actual "inherited" characteristics to it any more.

Also note that the 8606 proration calculation does NOT include any balances in non-IRA employer plans like 401(k)’s, 403(b)’s, 457’s or the federal Thrift Savings Plan. And that brings up a potential planning opportunity…

If your employer plan allows you to roll in money from an IRA, you can then roll in just the pre-tax portion of money in your IRA(s), and leave behind the after-tax money. And convert the after-tax money. So long as you roll all of the pre-tax money into the employer plan before December 31 of the year of your conversion, there will be no proration as your IRA balances will all be zero as of the end of the year.

And side note; the reason why the IRA-to-employer plan rollover trick works here is because the IRS prohibits non-IRA employer plans from accepting in after-tax money from IRAs. Therefore, by the virtual of tax code restrictions, you must leave behind any after-tax money in your IRA and can only roll in pre-tax money. Yay.

 

Time between when you contribute and when you convert

Prior to late-2017, there was concern in the industry that the conversion part of a backdoor Roth IRA contribution shouldn’t be done too soon after the contribution to the traditional IRA. This is because of potential concern about something known as the step doctrine rule, and that it could negate the ability to do backdoor Roth IRA contributions. The step doctrine rule essentially says that multiple different actions could potentially be constructively viewed as one combined single action.

It’s always been clear that anyone with earned income can make a non-deductible contribution to a traditional IRA, which is the first step in a backdoor Roth IRA contribution. And it’s always been clear that anyone can do a conversion from a traditional IRA to a Roth IRA, which is the second step in a backdoor Roth IRA contribution. And it’s also always been clear that if your MAGI was above a certain level, you can’t directly contribute to a Roth IRA.

With this in mind, many in the industry feared that the IRS might use the step doctrine to treat the two steps in a backdoor Roth IRA contribution as functionally just one step that simply resulted in making a Roth IRA contribution. And making a Roth IRA contribution isn’t allowed if your MAGI is too high. Therefore, there was a risk that the IRS would retroactively disallow having done a backdoor Roth IRA contribution. After all, the process has been given the name BACKDOOR, which kind of implies people know it’s an intentional workaround!

As a result of this fear, many folks used to advocate waiting a certain amount of time between making the after-tax traditional IRA contribution and doing the Roth conversion. The thought was that the longer you wait, the more you could make a defensible case that you weren’t doing the traditional IRA contribution just with the intentions of converting it, hence the step doctrine wouldn’t apply. Some folks advocated waiting a few days, others advocated waiting at least a month, others advocated waiting at least a quarter. Some even recommended waiting until the next year!

The challenge was that neither Congress nor the IRS ever gave clear guidance on the matter; the industry was left to make its own guesses about whether the backdoor approach would ever get questioned and/or outright disallowed.

However, in December 2017, Congress all but outright blessed the backdoor Roth IRA contribution. Specifically, footnotes numbers 276 and 277 to a Congressional conference report about the Tax Cuts and Jobs Act, say:

“The provision does not preclude an individual from making a contribution to a traditional IRA and converting the traditional IRA to a Roth IRA…” 

And

“In addition, an individual may still make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA…”

While the footnotes don’t explicitly say, “backdoor Roth IRA contributions are allowed,” they nonetheless make it clear that Congress allows people to make traditional IRA contributions and then do Roth IRA conversions. There is no mention of needing to wait a certain amount of time, no mention that the backdoor approach would be questioned, no mention of the step doctrine, etc.

As a result of those footnotes, the vast majority of the industry is now comfortable in saying the step doctrine rule isn’t a practical concern, and there’s no need to wait any minimum length of time between doing the after-tax IRA contribution and subsequent Roth conversion.

Also keep in mind that the longer you wait between the IRA contribution and the Roth conversion, the more growth you might build up on the money in the IRA. Which means your $7,500 after-tax contribution in our example might grow to $7,600 (or whatever amount) if you let it sit for months in the IRA earning interest. So then when you do finally get around to converting it, you now have $7,600 in your IRA: $7,500 of after-tax basis, and $100 of pre-tax growth. Not the end of the world, but some of your conversion is now going to be taxable in this case.

 

Employer plans and the MEGA backdoor Roth contribution

The concept of making an after-tax contribution to an otherwise pre-tax account and then converting that after-tax money to a Roth account isn’t limited to just IRAs. It can be applied to non-IRA employer plans like 401(k)’s, 403(b)’s and 457’s. But I’ll use 401(k)’s as the example for the rest of this article.

Some employers allow participants to make after-tax contributions to their traditional/pre-tax 401(k)s. Note that these “after-tax” contributions aren’t Roth contributions, where the participant makes a non-deductible contribution to a Roth account within their 401(k). But instead, similar to an after-tax IRA contribution, where the participant makes a non-deductible contribution to the traditional pre-tax side of their 401(k).

Since it’s after-tax, there is no initial tax break on the amount of the contribution. But also, that money won’t be taxed again whenever taken out of the 401(k). And, like with a traditional IRA, any earnings on the amount of the after-tax contribution to the 401(k) would be pre-tax and eventually taxed whenever taken out of the account.

Furthermore, employers who allow employees to make after-tax contributions to their 401(k)’s might also allow them to do “in-plan” Roth conversions from the traditional side of the 401(k) to the Roth side.

Additionally, unlike with IRAs where all pre-tax and after-tax balances need to be mixed together such that all conversions out would be subject to the Prorata Rule, 401(k)’s do NOT have the same overarching IRS-imposed proration requirement. Employers are allowed to set their plans up such that employees CAN choose to convert just after-tax money or just pre-tax money.

Hopefully at this point you can see where I’m going; the concept of 401(k)’s potentially being able to do a backdoor Roth contribution process similar to how IRAs can but potentially without the hassle and monkey wrench of having to deal with proration on the conversion.

Without getting into specific numbers, just know that employer plans like 401(k)s are able to allow potentially tens of thousands of dollars to be contributed by the employee on an after-tax basis. And if the plan allows in-plan Roth conversions of just after-tax money, that means the employee can then do a tax-free conversion of tens of thousands of dollars of after-tax contributions from the traditional side of their 401(k) to the Roth side, via the backdoor concept.

Considering the potential dollar amounts of money that can get into a Roth 401(k) via the backdoor is multiples of the amount you can potentially get into a Roth IRA via the backdoor (since IRA contribution limits are so much smaller than 401(k) after-tax contribution limits), the strategy has taken on the name MEGA backdoor Roth contribution.

Again, not all employer plans allow this. So before getting too excited about potentially doing a mega backdoor Roth contribution in your 401(k), 403(b) or 457, ask your employer if they allow 1) after-tax contributions and 2) subsequent in-plan conversions of JUST those after-tax contributions. If your plan allows #1 and #2 BUT makes you use the Prorata Rule when doing the conversion part, that might make the whole process not worth it, as the tax implications could be high.

 

Well, that’s it for what I wanted to say about backdoor Roth contributions. This doesn’t cover every single angle to have to potentially look out for, but it at least covers the big ones you’re likely to face. I hope you found this helpful!