Mega Backdoor Roth IRA – Is It For You?

The Mega Backdoor Roth IRA is a relatively new concept that has generated a lot of buzz in the investment community. But what is it, and is it worth taking advantage of?

Roth IRA accounts are a common way people use to invest in their future. The main reason is tax-free income in retirement. However, the problem that comes up is if you have a high income and want to save more because the contribution limit for this plan is $6,000 in 2022 (or $7,000 if you are older than 50).

Many people have turned to the mega backdoor Roth IRA that guarantees to boost your annual Roth contributions to over $30,000 each year.

We are looking for an option that will boost our income, help us save more to achieve our financial goals, and have a peaceful retirement. Therefore, today we are talking about:

  • What is the mega backdoor Roth IRA?
  • How does the mega backdoor Roth IRA work?
  • What are the differences between the Roth 401 (k) plan and the mega backdoor Roth IRA?
  • Is the mega backdoor Roth right for you?
  • The Infinite Banking Concept as the best alternative.

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Let’s investigate the mega backdoor Roth IRA strategy!

Background and Caveat

Roth and Traditional IRA:

With Roth IRAs, you can invest money after paying income tax, and then those dollars grow with no taxes. Still, to particular individuals or families with higher income who want complete financial independence from their careers before they retire, some restrictions like the maximum contribution limit may make this option less desirable than others.

The maximum IRA contribution limit in 2022 is a $6,000 non-deductible traditional IRA contribution ($7,000 if age 50 or older). Suppose that your income is $60,000 and you contribute $6,000 to a traditional IRA, then your taxable income that year will drop to $54,000.

However, some employers allow savers to put tens of thousands of additional funds via after-tax contributions courtesy or other tax rules.

The Backdoor Roth IRA

It is a strategy for people with high incomes who are not eligible to contribute the maximum amount in their regular tax-deferred retirement accounts. You roll money from your traditional IRA over into this type of retirement savings vehicle, which has no limits on how much can be contributed or converted.

That’s good because if you have pre-tax money sitting around, then some taxes will likely come to bite down hard when all those invested funds get reported during each year’s filing season.

However, with a normal backdoor Roth IRA, you will need to pay income taxes on the amount of money converted into your account. This is because it will be treated as if all funds came from new investments and not existing ones within his original traditional IRA.

Mega Backdoor Roth

It is a step forward, designed for people with a 401 (k) plan at work. They can invest up to $40,500 in 2022 of after-tax dollars into their retirement plan and, after that, roll it into a mega backdoor Roth. Also, it avoids the taxable event that a normal backdoor Roth IRA conversions usually create.

The caveat is to be extremely careful because creating a mega backdoor Roth is complicated due to many moving parts and potentially hit with unexpected tax bills. The recommendation is to consult a financial planner or tax advisor before considering a mega backdoor Roth conversion.

Take a closer look at this strategy!

What Is a Mega Backdoor Roth IRA?

Situations when you are prohibited from making Roth IRA contributions:

  1. If you’re filing single or head of household and your annual income exceeds $144,000 (in 2022).
  2. If you are married, filing jointly with annual income limits of $214,000 (in 2022).

Thus, a backdoor Roth IRA offers a solution: people in described situations may contribute money to a nondeductible traditional IRA and convert it to a Roth IRA account.

A mega backdoor Roth IRA copies this in-plan Roth conversion technique but manages  (or excludes) significantly lower tax liability on the conversion.

Here is a checklist to find out whether is this strategy is possible for you or not:

  • You’re earning more than $144,000 if you’re single or head of household (or more than $214,000 if you’re married and filing jointly).
  • You’re maxing out your employer’s annual 401 (k) (or 403 (b) or 457 plan) or your solo 401 (k).
  • This condition is optional, but if you’re maxing out your annual, nondeductible traditional IRA contributions of $6,000 (or $7,000 if you are over 50).
  • Also optional – if you can afford to make an additional after-tax contribution over the $20,500 annual 401 (k) limit ($27,000 if you are over 50).

Mega Backdoor Roth strategy and the Pro-Rata Rule 401 (k) withdrawals are generally subject to the pro-rata rule, which says that a person can’t exclusively withdraw pre or post-tax money from a traditional 401 (k) plan. Suppose that someone has no money in any other pre-tax IRAs; they are allowed to avoid the pro-rata rule and a hefty tax bill and make a $6,000 non-deductible traditional IRA contributions in 2022.

Don’t worry if you don’t meet these conditions. There is always another retirement plan that will suit your needs! 

Now let’s see how it works!

How Does a Mega Backdoor Roth Work?

Once again, you need to have an employer 401 (k) that allows after-tax contributions (don’t mess up with Roth contributions).

Side note for after-tax 401(k) contributions: the IRS limits on total 401 (k) contributions (pre-tax contributens, after-tax contributions, employer matching contributions, and any other non-elective employer contributions) is $61,000 for 2022.

These limits for total employee and employer contributions have increased over the past years. It refers to both pre-tax and after-tax funds.

It means that you can contribute $20,500 pre-tax dollars, and your employer contributes their percentage. Additionally, some Roth 401 (k)s even let you contribute the rest of your money in tax-free withdrawal.

It is possible to designate after-tax 401 (k) contributions to a money market fund to ensure no pesky gains during the period money is sitting there.

For example, if you contribute $20,500 pre-tax, and your employer matches you $6,000 for your 401 (k) account, it leaves you with $34,500 that you can contribute after-tax if your employer allows it.

Another option is if you have a solo 401 (k) plan, you can set up your plan to allow it. This is especially valuable for small business owners.

Thus, the basic strategy is to take all the money from the after-tax contribution to your 401 (k) plan and transfer it into a Roth IRA quickly!

Instead of Roth IRA, you can transfer it to Roth dollars within your 401 (k) as well. In Roth dollars, after-tax contributions are converted tax-free. Just make sure to do it before it can accrue investment earnings.

After transferring into a Roth-style account, the money will grow tax-free. That is convenient because otherwise, it would be tax-deferred.

In this process, speed is crucial. Because in-service withdrawals or in-plan conversions are one of the preconditions. Nobody wants to wait until leaving the employer to move that amount of money.

The drawback of waiting is that any growth from after-tax contributions will become part of the pre-tax balance (in contrast to Roth dollars).

Note: If someone has any earnings on the after-tax portion, that after-tax portion is taxable on the transfer due to growth without taxes in 401 (k). If the money stays as an after-tax contribution in 401 (k), it will be accruing taxable earnings the whole time. Speed is one of the reasons why this process is complicated.

After-Tax Contributions

Some plans support additional after-tax contributions when someone maxes out their employee 401(k) contribution limit for the year.

Additional after-tax contributions comprise money that’s already been taxed. It’s similar to Roth contributions, except earnings on after-tax contributions are taxable upon withdrawal, while Roth earnings are tax-free.

In-Service Withdrawals

In-service withdrawals are necessary for this process. After making after-tax contributions, a person has to take an in-service withdrawal before the contributions generate returns that would be taxable during a rollover.

If Your 401 (k) Plan Allows After-Tax Contributions

If your employer offers an after-tax contribution plan, you must know the maximum amount you can contribute.

Suppose this info doesn’t come directly from them and instead requires a little research on behalf of their employees.

In that case, there’s some good news – allocating money into these accounts will ultimately give workers more control over what they do with extra cash. And if you don’t get an employer contribution, you can still stash the total amount into the after-tax bucket. In case you get a match, that amount will be reduced by the match.

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Moving Your After-Tax Money

When the plan doesn’t allow in-service withdrawals to a Roth IRA or in-plan rollovers to a Roth 401 (k), an employee has to delay the opportunity to do the mega backdoor Roth. In that scenario, please reconsider this strategy.

Running this account means throwing all of your after-tax savings into your after-tax bucket.

Very fast after that, you have to get your money out of that bucket and transfer it to either a Roth IRA or Roth 401 (k) before it starts to accrue investment earnings. When rolling over 401 (k) into a designated Roth account, you must pay income tax on the transfer of their pretax contributions and untaxed account earnings.

That’s because if left in the after-tax bucket, you’re going to owe income taxes eventually.

After putting in the Roth, the money grows tax-free. The basic idea is to get as much money into the Roth to get a tax-free growth in the shortest period.

However, if the after-tax contributions accumulate investment earnings, the IRS will be okay with it if you split up that money. You need to split it by rolling your after-tax contributions into a Roth IRA and the investment earnings into a traditional IRA account.

Side note: A plan must pass two different annual IRS non-discrimination tests annually: Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) test. A majority of people that went through these tests say that they had to consult a financial planner.

So, the contributions will grow tax-free while investment earnings will grow tax-deferred. The account owner just has to pay tax on income during retirement.

Money Left

Overall, a mega backdoor Roth IRA allows someone to get a considerable amount of money into a Roth IRA, but it is genuinely for people with high earnings. Only people who have a lot of money will be able to put aside that much savings.

This process is reasonable only if individuals first max out a regular or Roth 401 (k) and a Roth IRA.

The following is the short list of reasons:

  1. With a regular 401 (k), one person can get an upfront tax break. Their taxable income is reduced in the year when they make contributions, and they defer taxes on the investment earnings until retirement.
  2. With Roth 401(k), someone can contribute money that they have already paid taxes on. The tax break will be delayed, but money will still make tax-free, and a person gets tax-free income in retirement.

It is not rare that people are below the income limit for a Roth IRA. In that case, it will be easier to contribute directly than to apply for a mega backdoor Roth IRA. So, if you’re above the Roth IRA income limits, keep reading this article because we will show you the alternative to achieve all of your financial goals.

Mega Backdoor Roth Benefits

Now that you know the basics of this account, we want to point out the benefits people can get if they decide to use this account.

More Money Towards Retirement Savings

At the same time, this is both the motivation for applying to this account and its benefit.

If the person is eligible, using the mega backdoor Roth can contribute thousands of after-tax dollars towards their retirement. 

Remaining Money is Maximized

Often investors question what to do with leftover money after maximizing their retirement accounts.

Many people decide to invest their money into short-term investments like health savings accounts (HSAs), high-yield savings accounts (HYSA), and certificates of deposit (CDs).

In mega backdoor Roth, retirement savings is the priority, making it valuable as a long-term investment.

Protected Retirement

The mega backdoor Roth promises will protect you down the line.

Assuming that you are young and in the prime of your career, now you are in a position to invest, but no one knows what the future brings.

An endless number of scenarios could happen that could delay your retirement. And ”the sooner, the better” rule applies for any investing and savings, not just a mega backdoor Roth.

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When to Avoid the Mega Backdoor Roth

Don’t let yourself be blinded by the potential benefits of this type of investment because it is not for all people. In fact, it isn’t for many.

Suppose you can participate; that is not enough reason to do it. Mega backdoor Roth might be unnecessary when a person is maxing out their employee contributions, their employer matching contributions, and they already have a backdoor Roth IRA.

If the person has pressing short-term financial goals, it is a good reason to avoid a mega backdoor Roth IRA.

We have in mind things like buying a new house, putting children through college, or paying down debt for short-term goals.

Thus, even if you meet the conditions for applying to this account, ensure that you’ve already covered these immediate financial needs before deciding to tie up your money until retirement.


  • Allowance to contribute up to six times more to Roth investment retirement account than possible without a mega backdoor Roth.
  • Avoiding waste of money.
  • It is convenient if the person wants to retire earlier.


  • Not all 401 (k) programs approve in-service withdrawals, and thus, the mega backdoor Roth.
  • The process is complex and confusing.
  • The majority of people don’t meet the condition of a high salary for application.

Do many people use Mega Backdoor Roth?

From all the above, answer is clear – nope. This isn’t a typical investment vehicle, mainly because most employers do not offer an in-service distribution and after-tax contributions.

Our reality is that most employers do not want to give their team better benefits. Even though many people are willing to try this option, few can do it. In addition, many people working nine-to-five cannot afford it.

Using all the benefits from this kind of retirement account requires a high salary, discipline, and commitment.

If you are meeting the criteria, don’t forget that mega backdoor Roth conversions aren’t the only option for maximizing your savings in the long run.

What About the Risks of Using a Mega Backdoor Roth?

The only real, but significant risk is not being able to touch your money for a long period of time. In that account will be a huge amount of money, and if you end up in a situation to unexpectedly need it, you can withdraw it with high penalty fees.

Of course, it isn’t something unusual for retirement plans, but it is still a risk. Before choosing this option, make a realistic assessment of your short-term goals. If you don’t plan this right, you will potentially lose a lot – of money, time, and nerves.

Is the Mega Backdoor Roth IRA Right For You?

After reading this article, you should have a better picture of whether the mega backdoor Roth is suitable for you or not. Every investor has a different level of knowledge, background experience, financial goals, tolerance of risks, and financial situation. Thus, every investor and portfolio is unique.

Everyone makes their own decision, trying to choose the best option and ensure a better future for themself and their family.

We cannot decide for you, but we are willing to show you what we think is a better alternative to invest in.


If you don’t meet the criteria, there are possible alternatives. There is a traditional backdoor Roth IRA conversion that skips the step of maxing out 401 (k). The contribution will be more negligible and with no taxes down the road. Additionally, Roth IRA conversion doesn’t have ab income restrictions.

There is an alternative to investing in a taxable account, such as investing in stocks that are also tax-deferred. But we want to show you the most optimal option for the most people. Let’s get into the details.

Infinite Banking Concept

The Infinite Banking Concept is a strategy that allows you to use your Whole life insurance policy as a retirement plan and investment vehicle. This concept has several conditions that need to be met to start, including having a Whole life insurance policy, cash value, and dividend-paying whole life insurance policy.

Furthermore, it can be used to build tax-free cash value, which can be accessed through policy loans. Policy loans are repaid with interest, but the interest goes back into the policy, not to the insurance company.

This makes the Infinite Banking Concept a great way to grow your money while getting tax breaks. Also, it is a great way to pass on wealth to your heirs because the death benefit is paid out tax-free.

Thanks to the Infinite Banking Concept, you’ll never owe taxes again.

Overall, Infinite Banking Concept is a unique and powerful way to grow your wealth and secure your financial future.

The key to success is to start early and make regular contributions. The earlier you start, the more time your money has to grow.

It is a great way to supplement your retirement income or even replace it entirely. It can also be used as an investment vehicle to grow your wealth. If you are looking for a unique and powerful way to raise your money, Whole Life Insurance policy may suit you.

Infinite banking is a strategy that allows you to have complete control over your personal finances. You decide how much will be a contribution limit each year and when it can be used in the cash-value account. The money can be used for various purposes such as emergencies or investments with guaranteed returns on their value even if stocks decline drastically from former highs set earlier this decade.

The best thing about infinite Banking concepts? The stability – because there’s no need or a chance to access capital through market fluctuations, meaning those enrolled under these policies don’t ever worry again about what luck has handed them.

Final Thoughts

So, what’s the best way to save for retirement? The answer may surprise you. While mega-backdoor Roth IRAs are a great option for some people, they are not ideal for everyone.

This is why it is important to check what works for you. A whole-life insurance and lifestyle banking have proven to be quite useful for many people who are ready to learn the system and get wealthy over time.