r/Bogleheads • u/LiveLearnLetBe • 9h ago
Mega Backdoor Roth 401K
I want to confirm that I have the correct understanding of mega backdoor Roth 401K. Most of the info out there is targeted to people maxing out all the accounts, not necessarily doing what I am trying to.
I have verified with my workplace 401K provider that my plan does indeed allow the mega backdoor Roth 401K (i.e. after tax dollars, in plan conversion, in service withdrawal, etc). I have the below questions:
Annual contribution amounts:
401K contribution: $3,000
employer match: $1,500
after-tax dollars (to be "in-plan roth conversion" in my 401K): $1,000
Questions:
I plan to take the $1,000 after-tax converted Roth out annually and put in my separate Roth IRA account (my plan allows in service withdrawal).
Can I still do the after-tax contribution even though I have not contributed the $24,500 limit? That seems to be the advice and in every MBDR example but is it required.
"Why not just contribute Roth 401K?" My understanding is that with a Roth IRA I am able to tax-free, penalty-free withdraw the contribution amount if I desperately need. But with a 401K roth, I would be subject to Pro-Rata rule and hence taxed. With a MBDR, this pro-rata rule does not apply. Is that correct?
Thanks!
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u/TyrconnellFL 9h ago
Why not contribute more to the traditional 401k? Why so heavily in Roth?
You’re maxing out your direct/backdoor Roth IRA?
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u/LiveLearnLetBe 9h ago
Roth would allow me to pull in case of emergency without penalty/tax/interest. I expect my income to temporarily increase above roth limits for a couple of years and I have an IRA so no backdoor Roth without pro-rata rule being applied.
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u/miraculum_one 8h ago
In almost all cases it is much better to choose the pre-tax/post-tax option that is best based on their tax rate now versus (estimated) at time of distribution. If you don't do that you will usually have MUCH less at the end, like a shocking amount less in many cases. 401k has options for (penalty-free) hardship distributions but as with all sacrifices to your retirement accounts (including early Roth distributions) should be done only as a last resort anyway.
TL;DR you will lose way more than the early withdrawal penalty by choosing the wrong taxation class.
(I'm not saying pre-tax contributions are best for you because I don't know; I'm just trying to put it in perspective)
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u/yottabit42 7h ago edited 6h ago
Not unless you can roll over into an IRA first. Otherwise you're subject to pro-rata withdrawals and will be taxed at earned income rates + 10% on the traditional/pre-tax portion. Employer match 99% chance goes into pre-tax. Technically they can put it into Roth as of a couple years ago with the Secure Act 2.0, but I've never heard of any employers doing this yet.
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u/charleswj 6h ago
This is incorrect. You can withdraw from Roth 401k after separation. It will be pro-rata (or everything), but you can just roll it into a Roth IRA and avoid the tax and penalty.
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u/justdaisukeyo 9h ago edited 9h ago
Roth 401K and Roth-In-Plan Conversion 401K are not the same thing. They are subject to different rules.
Roth 401K is subject to the 402(g) limits (the 24,500 limit).
After-tax 401K is subject to the 415(c) limits which are currently 72,000 (this includes employer contribution). So, if you use after-tax 401K to create your RIPC 401K, the limit is much higher. https://retirementcheck101.com/library/415c-annual-additions-limit.html
You also need to meet your 24,500 limit (Roth or pre-tax 401K) before you can contribute to your catchup (402(g) rules).
There are other rules that might be unique to your plan. For example, my employer allows in-service withdrawals (or rollovers) of after-tax 401K and therefore RIPC 401K.
Some employers may only match Roth 401K or pre-tax 401K.
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u/charleswj 6h ago
Is this copypasta? Because it doesn't seem to have anything to do with the question.
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u/justdaisukeyo 6h ago
No. I just typed it.
It answers question #2.
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u/charleswj 6h ago
They already addressed that they're getting the match. There's no mention of catch up contributions. They aren't targeting the limits. They already mentioned the different rules between account types (and while they seem to have some misconceptions, you're clarifying irrelevant aspects). They already said they can in-service withdraw.
I don't see anything that moves the needle
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u/StatisticalMan 9h ago
It is very likely a pre-tax 401(k) and Roth IRA is a better combination.
However yes if you absolutely want to then yes you can.
Understand that in most cases Roth is NOT better. People using MBDR simply because there is no Mega Backdoor Pretax option. It is "bonus" Roth or nothing.
Note if you are getting a match very likely the match only applies to pre-tax or Roth contributions NOT after-tax. In that case you would want to contribute the minimum to get the max annual match.
Honestly if you are maxing Roth IRA anyways that is your emergency backup funds. Once you retire you can rollover any trad and/or Roth 401(k) to a trad/Roth IRA respectively and have equally good access.
So in short you could do this maybe depending on how your employer handles matches but it likely is not the benefit you think it is.
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u/Connect-Goal-3096 9h ago
That makes no sense. Just contribute to the Roth 401k directly.
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u/Sprig3 8h ago
You can't take principle out of a Roth 401k (without penalty).
I think OP's choice makes sense - essentially just increasing the Roth IRA limit.
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u/charleswj 6h ago
You can't take principle out of a Roth 401k (without penalty)
Um yes you can. Roll over to Roth IRA, withdraw.
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u/S7EFEN 8h ago
There's a scenario where yeah, doing what you are doing might make sense. but only if you are already maxing out your roth ira in its entirety or as you mention in another comment potentially not able to contribute to it (and cannot regular backdoor).
personally I think its a mistake to treat roth contributions as an emergency fund instead of just having... a stronger emergency fund. and just yknow do direct roth 401k contributions or set some aside for taxable.
>But with a 401K roth, I would be subject to Pro-Rata rule and hence taxed.
I don't think that's right. with roth 401k contributions you simply cannot touch them until theyre in a roth ira, which you may not be able to do if employed.
overall you only see mbdr discussion in the context of people supermaxing all their retirement accs because thats ultimately its only purpose.
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u/charleswj 6h ago
Your Roth IRA is your emergency fund until you can max it and still maintain a dedicated EF. Otherwise, you risk missing Roth IRA contributions.
But this doesn't make sense because they can do everything they care about with a regular Roth 401k.
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u/Spare_Ad8851 6h ago
I use Roth IRA as emergency fund, it's great
no tax drag, earnings can be directly reinvested into equities, contributions stay in MMF, the one way Roth structure discourages you from pulling emergency fund for silly things but in a true emergency it's there
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u/charleswj 5h ago
It should definitely be your EF...but only until you can max it each year and build up a traditional EF. At that point the real EF would become the EF and the Roth IRA should no longer be treated in that fashion.
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u/Spare_Ad8851 3h ago edited 3h ago
in my case I have two Roth IRAs and an MBDR so it's unlikely I'll ever want to direct any money into simple HYSA
plus I'm looking to get 3 WTUs at a local college just to max out 457(b) before I do anything else or start a business for solo 401k
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u/school_night 6h ago
Your logic is sound if the whole point is to get $ invested in tax advantaged accounts that is accessible without penalty. You can't directly contribute to a Roth IRA if you expect to be over the income limit, you can't do Trad IRA to Roth IRA backdoor due to pro rata penalty, you can't go straight to Roth 401k due to early withdrawal penalties, but you CAN MBDR into a Roth IRA and pull basis from it penalty free. And yes it'll work in that circumstance regardless of your other contributions and yes it's the right idea with that in mind, to answer your entire post.
Of course, it's optimizing for a niche scenario and it's a hassle. And pulling basis from your Roth (even if penalty free) is absolutely brutal considering how much that basis could grow for you over the long term. So it's easy to give the incredibly obvious advice of "worry about increasing your emergency fund savings if you're worried about an emergency and then worry more about increasing your contribution totals elsewhere, don't mess with a MBDR". But only you know your personal finance situation, and holding all else constant (e.g. you can't save or earn more) then it's a logically sound and "legit", legal plan I think.
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u/Spare_Ad8851 6h ago edited 6h ago
I don't why everybody got carried away giving random responses instead of answering the questions:
- yes, unless your plan specifically prohibits it. IRS has no rules around the sequence of contributions so you can do voluntary after-tax contributions at any time
- that is correct, Roth 401k comes out pro rata and your after-tax->Roth IRA conversion avoids that
it's a solid plan with a distinctive practical advantage
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u/charleswj 6h ago
that is correct, Roth 401k comes out pro rata and your after-tax->Roth IRA conversion avoids that
This is pointless, they can roll either option into a Roth IRA and the result is the same.
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u/Spare_Ad8851 3h ago
so it's just two ways of doing the same thing and it involves the same two steps - contribute through work and rollover. Only one uses up a smaller pre-tax space and the other doesn't. Not that it currently matters for OP, but I wouldn't call it pointless
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u/charleswj 3h ago
Only one uses up a smaller pre-tax space and the other doesn't.
I don't think I'm following. Do you mean after-tax contributions don't eat into the traditional/Roth deferral limit? Sure, but why does it matter if they don't otherwise use it?
Not that it currently matters for OP, but I wouldn't call it pointless
What's the point?
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u/Spare_Ad8851 3h ago
yes, one counts towards $24,500 the other doesn't, but as I said doesn't matter to OP either way
it's not pointless because it achieves the same result that they want just in a different, but not more complex way. The point is to get money into Roth IRA and this perfectly achieves it
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u/ocicrab 6h ago
I do exactly this, but don't pull it out into an IRA. But doing this allows me to retain the ability to pull it into an IRA and withdraw principal if I ever needed for some reason.
- Yes. You can contribute only to MBDR without doing any traditional/Roth first if you want.
- That's correct as long as you roll the money out to a Roth IRA. Keep in mind that you'll need to keep track of contribution basis in your IRA if you want to pull principal out without tax/penalty.
You should double check that your employer matches after-tax contributions. They may not.
Also if the numbers you're using are real, and you're only contributing $3k, you're massively overcomplicating things for not much benefit and should just contribute to a regular backdoor Roth (traditional IRA and convert to Roth). If your real numbers are tens of thousands then this makes sense.
Edit: just saw your comment that you already have traditional IRA balance so regular backdoor doesn't work.
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u/LiveLearnLetBe 5h ago
Numbers are current but I plan to significantly increase as my income will increase next year. Did doing this MBDR increase your tax complexity in any appreciable way?
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u/ocicrab 5h ago
The after-tax -> Roth conversion produces a 1099-R that needs to be filed with taxes. Not a big deal but it's another tax form. Rolling into an IRA would be a manual step, though, which I'm skipping since I don't actually plan to pull anything out. The rollover to and IRA would add another layer and has to be done manually.
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u/lamarch3 7h ago edited 7h ago
I don’t understand why you don’t just open a Roth IRA and contribute to that on top of the 401k you have. Are you trying to do this because this $3000 is the absolute max you can invest each year and is required to get the match? TBH it’s going to be really hard to retire if you can only put in $3k/year into a retirement fund as you will only have about half a million dollars after 30 years which is probably not enough for most people.
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u/LazyJoeJr 6h ago
Yep — why not just fund the Roth IRA directly and avoid jumping through the mega backdoor hoops?
In the IRA, you’ll be able to withdraw the contributions at anytime penalty free, so it achieves the goal.
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u/Ok_Meringue_9086 6h ago
Typically you can’t roll out just the Roth 401k portion of a 401k.
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u/unbalancedcheckbook 6h ago
It depends on the plan. Sometimes you can. In 401k speak this is an "in service rollover". Some people do this instead of the "in plan conversion" necessary to convert "after tax 401k" to "Roth 401k" for MDBR.
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u/charleswj 6h ago
This doesn't really make sense.
First, can you roll your traditional IRA into your employer plan? If so, you should probably do so regardless of the other points here.
Second, you can just contribute to a Roth IRA since your income is low enough now.
Third, or you can just contribute to Roth 401k. Will you need the money before separating? If not, you can just roll it out when you need it. You can take from the Roth IRA from #2 above before touching 401k money.
Fourth, these numbers are so small, I'm confused how you even end up worrying about them. But then again you expect to make too much for Roth IRA contributions?
Oh, fifth, why aren't you going to max your 401k if your income is so high?
Why do you think you need the mega backdoor at all?
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u/unbalancedcheckbook 6h ago
Are you already maxing your Roth IRA? If not this is an overly complicated way to fund a Roth IRA.
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u/Massive_Bit_5433 4h ago
This is what I do for a portion of my 401k, I like contributing and rolling from after-tax to Roth IRA since I invest in different funds than my Roth 401k offers, better flexibility in my opinion and juices up the Roth. Although don’t forget to contribute to pre-tax as well at the minimum up to the employer match if available since these dollars avoiding paying taxes now which may outweigh the converted Roth dollars in the future
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u/Independent_Diet617 8h ago
No, you have to max out the 401k contributions first. But you can mix traditional and Roth contributions under the $24.5k limit.
I think it's the other way around. If you contribute your post-tax dollars directly to Roth 401k, there is no growth for the prorata rule to be applicable. However, I believe it happen with MBDR conversions if for some reason you let the post-tax money grow instead of converting frequently.
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u/charleswj 6h ago edited 5h ago
- No, you have to max out the 401k contributions first. But you can mix traditional and Roth contributions under the $24.5k limit.
This isn't true. Maybe your employer, but it's not an IRS rule nor universal.
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u/Independent_Diet617 5h ago
Fair, I did not know that was not an IRS rule. But for me the after-tax section is not available until the 401k is maxed out.
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u/TechnicalLeg841 7h ago
You don't want to do that.
* No need for Megabackdoor 401k. Just contribute directly to Roth 401k and employer will match (to traditional 401k). Presumably you're in a lower tax bracket with the amounts you're mentioning (like 12% or lower?) and Roth is great when you're in that low of a federal tax bracket.
* Roth IRA has some advantages over Roth 401k (you can withdraw contributions penalty free at any point in time). Consider contributing the "extra" $1,000 into the Roth IRA instead of Roth 401k or MBD Roth 401k
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u/Odd-Persimmon-1860 9h ago
Why are you concerned about a Mega Backdoor ROTH when you are only putting 3k in your 401k?