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What is a MEGA BACKDOOR ROTH IRA contribution?
Рет қаралды 368,557
Күн бұрынThis video explains in detail what the Mega Backdoor Roth IRA contribution is: a way to bypass the contribution limit on Roth IRAs (which is $6,000 in year 2021) and stash even more of your cash away in a tax advantaged account. It makes use of a special type of 401(k) contribution, called "after-tax" contribution (I always clarify it is "after tax, non-Roth" to distinguish it from a Roth 401(k)).
These after-tax contributions are not subject to the normal contribution limit ($19,500 in 2021). In fact, you are allowed to contribute up to $58,000 using this special type! Then to perform the mega backdoor Roth maneuver, you take an in-service distribution of your after-tax 401(k) money and convert it to a Roth IRA.
The Mega Backdoor Roth Ira is a way to bypass the CONTRIBUTION limit of a Roth IRA
The (regular) Backdoor Roth IRA is a way to bypass the INCOME limit of a Roth IRA, which I explain here. I compare the two in this video: • Backdoor vs Mega Backd...
UPDATED 2021: Although all the information in this video is still accurate, I've created a new video with some more information on the Mega Backdoor Strategy! Check it out here: • Mega Backdoor Roth Imp...
@bollyfan1330 Жыл бұрын
There is a third option you are missing. The employer can allow for in-service in-plan ROTH rollover. Meaning money can go from an "After-Tax 401(K) account" to a "ROTH rollover 401(K) account" both accounts being within the 401(K) at the employer.
@dsmith4140 2 ай бұрын
You were the one who explained this on here four years ago and I’ve been doing it ever since. Thanks.
@WillPeterson 2 ай бұрын
I'm really happy it's been helpful. In the description I have a link to a follow-up video I made, that might make things even easier for you. Thanks for watching!
@talanky 5 жыл бұрын
Fantastic explanation of a seemingly complicated mechanic that you make really simple. I especially like how you explain how to practically do it instead of just the theory, that part is left out in so many articles!
@WillPeterson 5 жыл бұрын
Thank you! That's high praise! Let me know if there's anything else I can help explain!
@vmanshooting 6 жыл бұрын
this is the best explanation of the mega backdoor roth ira. thanks
@krizh289 2 ай бұрын
Just got my first job at 20 that'll be paying me a boatload of money (I plan on maxing out all my retirement accounts early so I can get that delicious compounding) and the visual animations here were super useful to understand.
@paterjo8561 4 жыл бұрын
This was a great video that clearly walks through the benefits of the backdoor Roth and you also walk through the steps to make it happen. Many of the other videos on the same subject talk about the benefits but don't walk you through the steps to make it happen and just refer you to the video owner for paid advice. Thanks for this excellent video!
@jonahum92 5 жыл бұрын
This is by far the best explanation I have seen! Thanks!
@russellthompson2146 6 жыл бұрын
Ya man, good job. Complicated subject explained well and easy to understand. Thanks man!!
@shinepushpanful 4 жыл бұрын
This was the most easy to understand explanation of mega backdoor Roth. Great job
@jeanp.5929 3 жыл бұрын
I'm most likely never going to do this but I'm glad I learned about it. KZfaq University. I never want to graduate.
@SomeIndoGuy 6 жыл бұрын
this video is really usefull and may I add that the bar chart visualization really works in explaining the concepts, good job
@ronandervin9803 4 жыл бұрын
I've been struggling to get my head around this. Watched multiple videos but this is by far the best and easiest to understand!! Thanks!!
@WillPeterson 4 жыл бұрын
I'm Really glad to hear that Ronan! Cheers!
@afriendabroad2083 4 жыл бұрын
Excellent- I started doing this and was surprised by how Wells Fargo customer support couldn’t understand what I wanted to do but very good idea at the end to write out instructions to the receiver
@WillPeterson 4 жыл бұрын
Yeah I've found it's really "hit or miss" with the customer support staff. Some people instantly understand what you are trying to do, other's don't get it
@WillPeterson 3 жыл бұрын
Although all the information in this video is still accurate, I've created a NEW video which improves the mega backdoor strategy and explains how I do it a bit differently now! kzfaq.info/get/bejne/ftmKdtSlt86mdoU.html
@WilliamSurles 2 жыл бұрын
thank you. this was the best, most simple, most clear and to the point explanation of what this is. It was perfect.
@i-chunhuang8413 Жыл бұрын
I am just writing to say thank you. You made it simple and clear to understand!
@flvyu 4 жыл бұрын
I need to watch this a few more times
@WillPeterson 4 жыл бұрын
Let me know if there's anything I can help explain!
@SG-vb5se 4 жыл бұрын
This it THE BEST explanation on the mega backdoor mechanics
@JayAbreu12 5 жыл бұрын
Amazing work, the visuals truly helps. Thank you very much
@WillPeterson 5 жыл бұрын
Glad it was helpful!
@stevencanden2911 3 жыл бұрын
This explanation is incredible. Hats off to you, sir.
@megalomaniac7972 Жыл бұрын
Thanks for making this! The visuals really helped me understand this. My company just added that we can convert pre-tax 401k dollars to roth..so I think I can finally use this approach.
@AniqueAkhtar Жыл бұрын
I think you should not touch your pretax 401k. Only convert your after-tax 401k into either a Roth 401k or Roth IRA account.
@ninumedia 5 жыл бұрын
Your explanation of this topic was absolutely the most detailed and helpful! Thank you so much!
@adamrichardson6918 3 жыл бұрын
Great to see other millennials doing this! Only difference for me is I just pay income tax on the earnings and convert them to Roth, this way I can still do the "back door ira to roth" conversion as well.
@jj7958 5 жыл бұрын
I do the traditional 401K with my company and a Roth IRA. I'm putting in the max for both of those and that is already taking a pretty big chunk of my current income, which is a good thing since I am young and it can grow overtime. Maybe it depends on how much you are making and what your income goals are in life, but with the two investment accounts I have, I think that is more than enough for the average person. If you are maxing that out for however long you can for both accounts and if you are putting in as much as you can after that, you'll probably be living very comfortably in retirement or whenever you decide to take that money out, if you start pretty young to let it grow. Good video too and is good information to have for those who want to save even more money in life. 👌🏼
@Fubbles62 5 жыл бұрын
Best information on this topic that I’ve seen. Thank you for the clear explanation.
@crazy4beatles 2 жыл бұрын
Fab explanation. Crossing my fingers my 403(b) plan allows for it.
@mikew.2016 Жыл бұрын
I have been dollar cost averaging into my trad IRA for several years and converting the full balance to Roth. Your video helped me figure out I have been doing it wrong, dang! It looks like I will need to pay tax on the trad earnings or contribute one lump sum. Bummer!
@osalas36 4 жыл бұрын
Bro, your videos are awesome!!!!! Love the graphics, way easier to visualize
@WillPeterson 4 жыл бұрын
Thanks dude! I appreciate it.
@fredwang2004 4 жыл бұрын
Very clear explanation , calling my 401k administrator tomorrow
@SriRam-yq4id 3 жыл бұрын
Excellent video Will and thanks for sharing your knowledge.
@chriskoch99 7 жыл бұрын
This is by far the best video I've seen on the topic -- thanks! One question. If we assume the person doing this is a high-income earner who can't otherwise contribute to a Roth, would it then work to also subsequently convert that IRA (with the earnings from the after-tax non-Roth funds) into their backdoor / mega-backdoor Roth IRA? Or is that too devious lol... surely they have to get their tax on the earnings somewhere.
@WillPeterson 7 жыл бұрын
Converting the (untaxed so far) earnings in the tIRA into a Roth IRA would be a taxable event. That year you would be taxed on the amount of the conversion. If that's what you want, then you actually can simplify this whole process. Just roll the WHOLE amount from your afer-tax 401k (contributions + earnings) directly to the Roth IRA. You'll be taxed on the earnings (just as if you had done what you suggested: first sent the earnings to a tIRA, then converted them to Roth) I'm glad you found it useful!
@hendrikvanderzandt1899 6 жыл бұрын
I imagine that you could use the Roth conversion ladder later on though to roll your tIRA funds (incl. the untaxed earnings) into a Roth IRA account when your income that year is low enough that you would effectively not pay any taxes on those conversions and then wait 5 years for the money in the Roth to season before withdrawing tax free.
@escargot8854 4 жыл бұрын
best explanation I've heard. thanks for sharing
@chihiroa1045 2 жыл бұрын
Most clear video on this subject! Thank you.
@JessieOpportunityCostInvesting 3 жыл бұрын
Hey Will! Knock out video bro. I'm guessing this doesn't apply for the tsp but it's certainly a very valuable tool to look into and if nothing else, have in our toolbox. Thanks for sharing! I'm subscribing and binging more content!
@WillPeterson 3 жыл бұрын
Thanks Jessie! I really appreciate the feedback!
@Krazylion10 6 жыл бұрын
First video I watch for you, and I am subscribing. Very helpful method described!
@IkeOzurumba 4 жыл бұрын
This is a FANTASTICALLY explained video on this subject. Thanks!
@michaelparker3188 2 жыл бұрын
Thank you! You are the man. 😎
@YubaaNYC 4 жыл бұрын
Hi Will, this is such a good information for everyone. Thank you 🙏 so much for your efforts.
@michaelgriffin7889 3 жыл бұрын
Great video! Thank you for such a clear explanation, as well as providing an actual example of the letter. I’m in the same boat with my 401k at Fidelity and Roth IRA at Vanguard, so was wondering how to do this.
@michaelgriffin7889 3 жыл бұрын
Aaaaand just watched your most recent video on this...even easier!
@ttsupra87 3 жыл бұрын
It is not very often that my mind is blown I was clueless about what I just watched sweet Jesus! So a little sketchy on specifics but now I gotta do some more research
@WillPeterson 3 жыл бұрын
no worries dude this stuff is overwhelming if you jump right into it. Keep reading and lmk if you have any questions!
@4BAMA10 3 жыл бұрын
Awesome advice, I had no idea this was possible!
@macornman Жыл бұрын
Clear, concise, perfect
@lHurtYourFeeIings Жыл бұрын
This is an excellent presentation.
@medinanetwork 4 жыл бұрын
Gracias for the explanation, very straight forward.
@EoeSantinny 4 жыл бұрын
Great video! didn't know this strategy existed. job well done!
@Ma89644 3 жыл бұрын
Best explanation ever.
@christychan337 4 жыл бұрын
Thank you Will Peterson! You are the best! I finally got it.
@samia1000 4 жыл бұрын
Incredible explanation! Really easy to follow. Thanks! Subscribed.
@Chris-py3ec 3 жыл бұрын
Just found out employer offers this. Thank you!!!
@WillPeterson 3 жыл бұрын
Fantastic! One of the lucky few!
@rajukamal Жыл бұрын
Very useful. Thanks for your efforts
@palyada1 5 ай бұрын
Underrated video!
@generalfeed123 3 жыл бұрын
just remember to not only type “mega backdoor” when searching for ira information
@thegaryliao 3 жыл бұрын
Best mega backdoor explanation wearing in tank ever! lol Thanks a million! Just out of curiosity, why you made $2,623 check only when you can contribute additional up to $30K? Wouldn't it be easier just rollover a big lump sum to Roth IRA before filing tax report? Or does that contribution need to stay in 401k for a while, so you transfer a portion of it once in a while?
@nararakesh1 4 жыл бұрын
Good explanation Will, it helps. Here is my suggestion : if you explain something like when you can withdraw the money with penalty and without penalty from different accounts, that would be cool.
@jorgepvenegas 4 жыл бұрын
I finally understood this thing!
@WillPeterson 4 жыл бұрын
Yay! Glad I could help
@DamaniJones 4 жыл бұрын
Still the best video on this out there.
@WillPeterson 4 жыл бұрын
Haha thanks!
@Juan_Hernandez_Jr. 5 жыл бұрын
Sounds great, I just don't understand. I'll watch again. Thanks!
@fitybux4664 3 жыл бұрын
Tell your employer you want to do mega backdoor roth IRA (or don't...) with their 401k. (In reality you just want to ask about the attributes of their 401k. Does their 401k allow after-tax contributions and in-service distributions?) If things are not compatible, tell them you want to work as a 1099 contractor for them instead of W-2, (if you have a close relationship with them they might agree) direct the 1099 to the EIN of a new company that you create / own / work for, then open a Solo 401k and push every penny of money (~$58k max) into that for retirement. (Bonus points if you get to double the mega roth IRA if you have a spouse and if he/she participates in the business.) Then, push that all into a Roth IRA and make massive returns. I'll meet you on your yacht. Beginner hint: Once you go the 1099 route, it will affect your credit and ability to purchase large ticket items like mortgages and cars.
@MzRobinWiggins 3 жыл бұрын
That’s a phenomenal explanation
@kravenofspider 3 жыл бұрын
Easy to follow graphics.
@notreallyme425 3 жыл бұрын
Some companies allow this to be done automatically if they have a Roth 401k option. So if you’re already maxing out your regular 401k contributions you can make an extra “after tax” contribution and immediately roll it over to the Roth 401k in the plan. Immediately being the same day so there’s no gains or losses to contend with on the rollover. The company’s plan has to allow this and usually has a company managing it that can support it - Fidelity actually promotes this to their clients and offers it for the plans they manage.
@WillPeterson 3 жыл бұрын
Right on! In fact I just discovered this and made a more recent video about it 😂
@ryants1 Жыл бұрын
I make more than the allowed amount for regular Roth IRA contributions. Would this be the next best option for me? I max out my 401k quickly
@fortgrove3166 Жыл бұрын
With my company 401k, it defaulted to traditional but I was able to convert it to a Roth, so now it’s a Roth 401k.
@VictorTheHan 4 жыл бұрын
7:09 when you convert from traditional 401k to Roth IRA you still need to pay taxes for what you are converting.
@Positive_commenter 4 жыл бұрын
It's not coming from traditional. It's after tax, this already taxed so only gains are taxes.
@tpolly480 3 жыл бұрын
Earnings on after tax accounts converted to a Roth IRA is a taxable event.
@tonymp 6 жыл бұрын
Thanks man, this is helpful and perfectly clear. Now I just need my company to remove the contribution cap so I can contribute up to the max!
@WillPeterson 6 жыл бұрын
Glad it was helpful man! Some people have had success petitioning HR: www.bogleheads.org/wiki/How_to_campaign_for_a_better_401(k)_plan
@BenjieBiyahengPilipinas 4 жыл бұрын
Thanks for the informative video
@stevenmorris2736 5 жыл бұрын
Great video man. As you can see I am 1 ½ year's late to the game and still found your video the BEST mega back door explanation around. I have been looking for weeks! 1 Question and 2 Video recommendations. Question: In the video, you keep mentioning “immediately” doing the transfer and then say “same year”. I don’t know if employers allow this every paycheck, but my company only allows in-service every 6 months. Therefore, my question is: 1) Since I can’t do immediately (6-month situation) would it be best to this in January for the prior year? So do the process in January 2020 for all the contributions saved Jan-Dec 2019? Or if the next year isn't possible, would late December be the only time someone is able to do this for funds saved Jan-Dec since you kept mentioning same year? Video Recommendations: 1) Roth Conversion Ladder 2) SEPP 72(t) Distributions
@WillPeterson 5 жыл бұрын
You could absolutely do it January the following year! The only reason I keep saying "immediately" or "the same year" is because ideally you want to move that money into the Roth ASAP, where all the gains will be tax free. Any gains you make while it still sits in the after-tax 401k are taxable. But the difference between a week and 6 mo or a year probably doesn't matter all that much! I usually do 2 a year: one after my bonus hits in March (25% of which I send to my after tax 401k) , and the other in January the following like you describe. Also thanks for the video ideas! I think I'll definitely take you up on that!
@stevenmorris2736 5 жыл бұрын
@@WillPeterson thanks man. Solid feedback.
@WillPeterson 5 жыл бұрын
Hey dude just wanted to say thanks for the idea on the Conversion Ladder video. Just finished it and uploaded it!
@tpolly480 3 жыл бұрын
6:40 Roth earnings are only tax free IF it’s in an ira for 5 years or more AND you’re 59.5.
@vishadpatel7070 Жыл бұрын
great video....thank you!!
@landlubber42069 6 жыл бұрын
Awesome video and clear answers. Thank you!
@initialb811 3 жыл бұрын
This was great. Do you think you might do an updated 2020/2021 video? Subscribing!
@WillPeterson 3 жыл бұрын
Done! kzfaq.info/get/bejne/ftmKdtSlt86mdoU.html
@initialb811 3 жыл бұрын
@@WillPeterson THANK YOU!
@lynnn7465 4 жыл бұрын
Excellent video explanation!!!!
@jerryeisner1 5 жыл бұрын
I love the topic. I"m trying to understand it. Can you do the same talk going slower with more examples. I'm extremely interested but could not follow or understand even though you did a fantastic job. There is just to much information going by me too quickly. I suppose lots of others are in the same category as me.
@javajava8856 4 жыл бұрын
Slow down the play back speed
@regimatic 3 жыл бұрын
Fantastic info. Thanks.
@GilmerJohn 3 жыл бұрын
I believe "Tax Free, High Yield" bond funds (especially ones that only buy bonds in your state give you many/most of the advantages of a Roth IRA without worries about the IRS. These funds (T.Rowe Price has one) most invest in discounted Industrial Revenue Bonds. There is risk but not much.
@KenBeaconHill 4 жыл бұрын
Excellent explanation.
@tatangl14 3 жыл бұрын
Great explanation. Thank you.
@Accipiter22 5 жыл бұрын
GREAT video on how to do this, thank you so much
@skatopher 2 жыл бұрын
this was helpful. thanks
@daleblack0ify 3 жыл бұрын
I just did something very similar I work at a government institution but it's run by private contractors and recently the contractor changed so I rolled my 401k over to my Roth IRA I did have to pay taxes but I see it as an advantage later in life
@precisionmedicine9091 2 жыл бұрын
I feel like Anthony Jeselnik is teaching me finance.
@6040adam 5 жыл бұрын
Man.. I love all of your video's.. you should piggy back off your credit card videos and make a video about using a HELOC to pay off debt.. specifically mortgage
@detroitengineering782 5 жыл бұрын
Simple explanation! Great video ! Let's get rich people
@InOrlando 3 жыл бұрын
Good video!!
@YingcredibleTips 4 жыл бұрын
Love it! Great explanations
@loatyty 3 жыл бұрын
Why don't you open roth IRA with fidelity. If you do, can they transfer from 401 to roth within Fidelity?
@aromo4800 Жыл бұрын
Can you also do a regular back door roth (6K in a traditional IRA and rolled into a Roth IRA)
@deejaydres 5 жыл бұрын
Thanks for the video! Great info! 2 quick questions. Can you do this after you have maxed out your Roth IRA contributions? Second, is the additional 30k you can put into the 401k coming from cash? Or it has to be deducted from your paycheck? Thanks again!
@WillPeterson 5 жыл бұрын
1. Yes, no problem. 2. Has to come from paycheck deductions! Good questions.
@aidanlittle705 4 жыл бұрын
Aren’t you allowed to convert the after tax bucket immediately into a Roth account tho?? Why wouldn’t you do that??
@epuresoul 3 жыл бұрын
thank you! an explanation I understand
@dpersky1 5 жыл бұрын
Great video!
@radhikasuresh9273 Жыл бұрын
Since the pre-tax and after-tax contributions are both held in the same 401(k) account, can you show the math around how the earnings number on the after-tax contribution was calculated?
@BobPreis 5 жыл бұрын
Fantastic explanation. Thanks.
@Cenlalowell 3 жыл бұрын
You still have to pay state and federal income tax on this money ??
@jayviz 4 жыл бұрын
Very well-illustrated video, but could you please point me to your source for the Total Contribution Limit of $54,000. For Tx Yr 2019, every site I go to says 19K + 6K catchup.
@bradknox 4 жыл бұрын
Rewatch from 2:35 to 3:42 to answer your question. The 19K you refer to is 18K in this video (from 2017).
@impmegaman 4 жыл бұрын
See the IRS website here on overall limits. Looks like it's $57,000 for 2019 now: www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
@fulefunk 4 жыл бұрын
Can you roll-over from a Solo (Self-Directed) traditional 401k w/ max contribution of 57k in 2020 to a Roth IRA? If so, how is this done and what portion can be rolled over?
@sujaykadam99 3 жыл бұрын
Do I need to max out my 401k contributions to be able to contribute to a after tax, non roth bucket?
@merrimac1 4 жыл бұрын
SO I'm kind of confused. You explained the pro rata rule in another video about back door Roth IRA. You basically need to empty your traditional IRA to avoid pro rata tax on the Roth conversion. How come you deposit more money to your traditional IRA while doing the MEGA backdoor ROTH?
@WillPeterson 4 жыл бұрын
Great question. I actually made this video before I exceeded the income limit for regular Roth contributions, and didn't yet require the (regular) backdoor Roth. The approach described in this Mega backdoor video of splitting earnings off into a traditional IRA probably doesn't make sense if you also want to do a backdoor Roth, because you would be subject to the pro rata rule. When doing the Mega backdoor now, I just roll all the money from the after tax 401k into a Roth IR, including the earnings, on which I am taxed
@bragot 4 жыл бұрын
@@WillPeterson Can you please clarify that? When doing the mega backdoor, you convert everything, including the earnings? Would those be subject to tax?
@WillPeterson 4 жыл бұрын
@@bragot correct.
@jeajea 4 жыл бұрын
@@WillPeterson could you do both the regular back door and mega back door RIRA conversions? or would the mega back door contribute to the $6000 cap of the RIRA? Great video btw
@jckclt 3 жыл бұрын
@@jeajea You can do both. An in plan roth-ira conversion, which is the name of the account, not mega back door, is completely seperate from a roth-ira, or back door roth-ira. Just make sure if you're doing both to not have any traditional IRA's at teh end of hte year
@falconxlc 6 жыл бұрын
This video is by far the best explanation of how a mega backdoor contribution works. I get that i need to ask my employer 401k plan if they allow me to make an after-tax, non roth contribution. What do i ask my roth ira company to verify if they can do this?
@WillPeterson 6 жыл бұрын
+Lin Cui on that end there shouldnt be anything you need to confirm, from their end it's just a standard rollover. Pretty much guarantee that all IRA companies allow it
@xochimahuac 5 жыл бұрын
I'd like to learn more about using an HSA for saving for retirement. Do you already have a video about that? If not, can you make one?
@WillPeterson 5 жыл бұрын
Love that idea! It's on my list now!
@bradchristo1 6 жыл бұрын
Disclosures on point.
@zac2641 5 жыл бұрын
Are these contributions subject to discrimination testing?
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