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Retired Military Finances 401: The Mega Backdoor Roth IRA Conversation

Retirement Funding

After retiring from the military, reaching your second retirement is exciting, but having enough to maximize your quality of life during retirement is key. You’ve may have heard of a backdoor Roth IRA, but for some looking to maximize their withdrawals in retirement, a mega backdoor Roth IRA may be the way to go.

What is a mega backdoor Roth IRA? Below we’re breaking down what you need to know about this retirement savings strategy.

A Reminder About Traditional IRAs vs. Roth IRAs

The money you contribute to your Roth IRA is after-tax dollars, meaning you will have already paid income tax on it before putting it into your account. In turn, that money continues to grow tax-free. Because you already paid taxes on that income before contributing it to your Roth IRA account, you do not have to pay taxes on it when you withdraw money in retirement. This, essentially, creates tax-free withdrawals in retirement.

If you choose to place your money in a traditional IRA account, you may be using pre-tax dollars. This means the money has not been taxed, which can be an effective strategy in lowering your present taxable income (if your income isn't too high). In return, the money in your traditional IRA account grows tax-deferred. Once you reach retirement and begin making withdrawals, you will be responsible for paying taxes on the withdrawals (unless you have basis because you made non-deductible contributions).

With both traditional and Roth IRA Accounts, there are restrictions and annual maximum contribution limits that may be adjusted annually by the IRS. Before contributing to your account, you’ll want to check these limits or ask your financial advisor to clarify.

Backdoor Roth IRA Explained

Roth IRA accounts have income limits. In 2021, you are ineligible to contribute to a Roth IRA account if you earn:1 

  • $140,000 or more as a single filer
  • $208,000 or more as a joint filer

If you are a high earner with an income above the IRS’s income limit for Roth IRA accounts, you still have the option to create a backdoor Roth IRA. Just as it sounds, this option allows high earners to bypass the income limits and still utilize the tax advantages of a Roth IRA account.

Here’s how to create a backdoor Roth IRA account in a nutshell:

  1. Open and contribute to a traditional IRA (likely not deductible, if you have a retirement plan at work).
  2. Convert your traditional IRA to a Roth IRA account (your account administrator will provide the necessary paperwork and instructions to do this).
  3. Pay taxes on any gains you converted from your traditional IRA account .

What Is A Mega Backdoor Roth IRA?

A mega backdoor Roth IRA is a complicated strategy that allows high earners, or perhaps someone who experiences a windfall of cash, to get up to $37,500 into a Roth IRA or Roth 401(k) account - on top of their regular contributions. This option is not available to everybody, as some 401(k) plan providers do not allow it.

If you’re considering this option, you’ll want to work with your financial advisor or CPA to determine first whether it may be beneficial to you, and whether or not you may be hit with an unexpected tax bill as a result.

How Does a Mega Backdoor Roth IRA Work?

In order for a mega backdoor Roth IRA to work, your employer must allow after-tax voluntary contributions to be made to your 401(k) account. These contributions would be a separate bucket of money from your regular 401(k) contributions, and they would not count toward your 401(k) contribution limit. You’ll want to check with your human resources department or plan administrator to determine whether this option is available to you.

Next, you’ll need your 401(k) plan to allow you to move your after-tax money. They may allow you to remove money from your 401(k) plan (while you are still employed and working at the company) into either a Roth 401(k) portion of your plan or out into a Roth IRA account - separate from the original 401(k) plan.

If your plan does not allow for in-service withdrawals, you may be limited to waiting until you leave your job to have the opportunity to roll that after-tax money into a Roth IRA account. For most people looking to use a mega backdoor Roth IRA strategy, this may not be a suitable option, as it can shorten the amount of time your money can grow tax-free in an account.

Who Does a Mega Backdoor Roth IRA Work Best For?

Mega backdoor Roth IRAs are complicated strategies with lots of steps, and they aren’t ideal for everyone. This strategy is typically most useful for those who max out their regular contribution limits and/or earn too much to be eligible for a Roth IRA. In addition, these people will have a substantial amount of savings leftover that they’re ready to dump into the after-tax bucket of their 401(k).

If this doesn’t sound like you, you may be better off utilizing a traditional or Roth IRA account and your 401(k) account to save for retirement.

It’s not a simple process, but if you think a mega backdoor Roth IRA may be the right option for you, have a conversation with a financial planner or tax professional to get started. They can help cover the finer details of this process and answer any questions about your potential tax liability if you choose to use this strategy.


If you found this article useful, you might like the following blog posts:

Retired Military Finances 201: What Does a Company Merger Mean For My 401(k)?


Retired Military Finances 101: Your Employer Suspended Its 401(k) Matching. Now What?


Retired Military Finances 101: 401(k) plans. A Lot Like TSP, But Not the Same


  1. https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2021

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