Mega Savings from the Mega Backdoor Roth

We recently discovered that Mr. BITA’s workplace allows us to invest in a mega backdoor roth. Wheeeeeee.

Mega what-now? The mega backdoor roth is the secret weapon in the financial independence arsenal. It isn’t that well known, it isn’t available to everyone, and it offers great tax benefits. This article will

  • Explain how to determine if your 401k plan allows for the mega backdoor roth option and
  • Show you a step-by-step example guide to actually doing such a conversion.

Also, I find that I just enjoy saying mega backdoor. It feels like I’m talking about something vaguely naughty every time I say it, so that is part of my motivation for writing this post.

So what is the mega backdoor roth?

The Mad Fientist does an excellent job of explaining what a mega backdoor roth is, and I’m not going to attempt to do better. Head over there to learn about this somewhat esoteric way to grow your stash.  

Does your 401k plan allow you to make use of the mega backdoor?

If you call your plan administrator and ask about a mega backdoor, you are probably going to be subjected to an uncomfortable sit down with HR. Don’t. Instead, first log into your account and see if there seems to be an option for you to contribute your after-tax dollars to your 401k plan. This might look something like this:

If there is no way for you to contribute after-tax dollars, the chances that you can take advantage of the mega backdoor are slim.

Now that you have determined that you can contribute after tax dollars, stand up and do a brief celebratory jig. Then you should probably call your plan representative (this can either be someone from within your company who deals with payroll or benefits, or you could try calling the company that administers your 401k plan e.g. Vanguard or Fidelity). Here is what you ask them:

“If I contribute after-tax dollars to my 401k am I allowed to do an in-service rollover to a Roth IRA? And if so, how often am I allowed to perform a rollover?”

If in-service rollover gets no traction you could try the phrases in-plan conversion or in-plan withdrawal instead.

If the representative you are speaking to seems completely clueless (and if you are dealing with a call center), hang up and try again. You might get lucky the next time.

Why is the frequency of the rollover important?

Remember the Fientist’s cool graphics? If you can’t rollover often, you may have a stickier tax situation to deal with. The after tax money that you contribute to your 401k will grow, and you will owe tax on that growth. You may have to do fancy things with a tIRA account to deal with this and keep detailed records in an Excel sheet. The ideal plan will allow you to rollover every paycheck so that this is not a concern. The important thing though is to understand what your plan offers, so that you can plan for it and do the right thing.

You should also ask if you can do the rollover online or whether you need to call in to execute the transaction.

Ok, I have access to a mega backdoor (damn, it is _still_ funny), what next?

  1. Figure out how much you can afford to invest every paycheck.
  2. Log into your 401k plan and set up your after-tax contribution amount.
  3. Wait patiently for your next paycheck.
  4. While you wait, decide where you want to invest this money (the same fund as the rest of your 401k? Or something else?) and, if necessary, set that up correctly. This will depend on your overall asset allocation and your tax efficient fund placement strategy.

Changing the asset allocation for your after tax dollars

In Mr. BITA’s plan, by default, our after-tax contribution would get invested in the same fund(s) as our pre-tax contributions. If we wanted to change the asset allocation of our after tax dollars, we could accomplish that change on the website of Mr. BITA’s retirement plan provider, Vanguard.

We would start by choosing the ‘Change paycheck investment mix’ option.

Next we would specify that we want to change our allocations based on the source of the funds.

We are then shown all the possible sources of funds and we would choose ‘After-Tax’.

We see that by default 100% of our after tax money would go into the Target Retirement 2050 fund. If this was not what we wanted, we would choose Select New Fund and the percentage amount and divvy up our money however we like.

Everything is setup correctly. Now the waiting begins.

Finally, into the rabbit hole and through the mega backdoor

Oh happy day! The waiting is done, and good things come to those who wait. You get your next paycheck, note happily that it is smaller than usual, and now you are ready to meander through your mega backdoor and enter the land of additional tax advantaged savings. What follows is a sample step-by-step guide to the process. This guide is based on the website of Mr. BITA’s plan administrator (Vanguard). Obviously, if you are using a different website, the steps won’t look quite the same, but hopefully this will give you an idea what you should look for and how you can accomplish the rollover.

Step 1: Are you going to move your after-tax money to a Roth IRA ‘in plan’ or ‘out of plan’? As we didn’t already have a Roth IRA elsewhere, and we were happy with the fund offerings within Mr. BITA’s retirement plan, we chose the ‘Convert to Roth within your plan’ option. If we wanted to move the money to an out of plan Roth IRA we would have selected ‘Manage my loans and withdrawals’.

Step 2: Read and heed the myriad warnings, but don’t be intimidated by them.

Step 3: Select the source of your rollover, your after-tax contribution. Select the amount. Be sure not to rollover any profits that you may have made. Refer to my note above about the importance of the frequency of the rollover.

Step 4: Proceed to the confirmation screen, double check everything, and agree to proceed.

Step 5: Wait for the rollover to complete. For us, this took two business days.

Ta-da! You have mega-backdoored your savings. Rinse and repeat as often as your plan allows you to. Happy Savings!


20 thoughts on “Mega Savings from the Mega Backdoor Roth”

  1. I have never heard of this. I’m self-employed now and contribute straight to a Roth IRA, otherwise I would give it a look with my former employer.

    Sounds like a really good option if you do not care for the funds offered in a 401k plan.

    P.S. Is that picture from Granada?

    1. Actually, it is in addition to your 401k. I believe that you can only contribute after-tax dollars to your 401k (and eventually do a rollover) once you have maxed out your pre-tax contributions.

      The photo isn’t mine (it is the first stock photo I’ve used on this blog actually, it turns out I don’t often take pictures of doors). I’ve been to the Alhambra though, and I could believe that this was taken there.

      1. I gotcha. My employer started offering a Roth 401k the last few years, so I initially thought this was an “either/or” type thing that some plans allowed. I never came close to maxing it out, I didn’t know FIRE existed until I became self-employed.

        I like the concept of this & I would definitely like the Roth rollover. I didn’t even know this was a possibility for some.

    1. The mega backdoor is the unicorn of savings vehicles. I hope your work plan lets you take advantage of it.

    2. I just recently had this option added by my employer as well and you can bet I was one of their earliest to sign up! The funny thing was that I was complaining the night before to some other people that my employer didn’t offer the after tax option (aka mega backdoor Roth) and the very next morning I get an email that it’s being added.

      Ask and you shall receive 🙂

      1. Ha. My place of work is being unresponsive. I’ve asked for it and have received a “Ooh that is interesting. We’re looking into it.” : / Luckily we have access to at least one mega backdoor via Mr. BITA’s employer.

        At least this settles the other issue that we touched upon – no we don’t work at the same company after all : )

        1. Could you really take advantage of more than one if your employer offered it as well? The US cap it quite high and you’d have to be saving at a pretty heavy rate to be taking advantage of 2 of these since the contributions are after tax.

  2. Interesting. I’m going to have to look into this. I am not very good with this type of thing and reading this made me have to stop and reread like 5 times…then again, we were trying to get the boys out the door for school so that may have been part of the distraction! 😉 I am calling today to dig a little deeper.

    1. I applaud you for even trying to comprehend the mega backdoor while getting the kids out the door. Do let me know if you have follow up questions that I can help with.

  3. I’ve been utilizing the “Mega Back Door” for the past 18 months, and was the first one in my company to take advantage of it. I try to tell everyone I know about the advantage, but many folks just don’t seem to care. It’s huge, and well worth the effort to roll over the After Tax $$ into a Roth!!

    1. My company doesn’t offer a mega backdoor yet. I’ve been trying to lobby for it. So far two (!!) people have expressed any interest.

  4. I recently changed employers and I saw my new company’s 401k plan allowed for these after-tax contributions, but didn’t really understand the implications. Then I went online and learned about the Mega Backdoor Roth, reading MF’s post first but not sure about the nuts and bolts, then I came across this post. Your explanation of how to talk to your company’s plan administrator is exactly what I needed. I found out that we can do in-service rollovers to a Roth, although we can only do it once a calendar year. Looks like I’ll need to set-up another excel sheet! I plan to take advantage of this for first time come Dec. 2017.

    1. I’m so pleased. This is exactly why I wrote this post – I had to figure out the how-to part myself. I’m glad you found it helpful. Congratulations on having access to this great savings vehicle and taking advantage of it.

      Thanks for taking the time to read and to comment J-Dot, much appreciated.

  5. Hi There, Stumbled upon your blog recently. Gobbling up your content like crazy. It has been an interesting read so far. The question is – My Company provides options for Pre-tax and Roth. Although I have never used the ROTH option. how does that come into this picture ? – Please take a look at the image here –

      1. Thank you. Ya I could contribute a total of $18,000 by combining traditional 401k and Roth 401k. Also I could contribute upto $5,500 to a Roth IRA (depending on the income limits).

        But the question is, how does this Roth 401k come into picture with this article. Roth 401k is still after tax money and grows tax free, but it cannot be withdrawn until retirement. However Roth IRA is withdraw-able after 5 years of account opening (correct me if I am wrong). So, can I still convert my Roth 401k to Roth IRA ?

        1. I’m afraid I’m not that familiar with Roth 401ks. About “Roth IRA is withdraw-able after 5 years of account opening (correct me if I am wrong)”. Almost, but not quite. You can withdraw contributions 5 years after the contribution was made, you can’t withdraw earnings early without penalty. Back to your question about rolling a Roth 401k into a Roth IRA: I’m not that familiar with Roth 401ks. I did find this article that seems to indicate that you can rollover a Roth 401k into a Roth IRA, but it talks about rollovers on termination of employment, not in-service rollovers.

  6. Thank you so much for the detailed step by step guide on ways to use the “mega” backdoor entry! I just checked my plan website and see a contribution tab for ROTH IRA (which is currently set to 0%). This option essentially looks like a no brainer!

    1. Beware the Roth IRA tab – that may be for direct contributions to a Roth IRA if you are below the income limits. Your plan needs to allow for after tax contributions to your 401k for you to be able to do a MBR. The best thing is to talk to your plan provider before you change your contribution %.


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