Back door roth

@jimtoo Do you know much about these? Our company just started to allow them and I am not sure I understand it all yet.

I was out of the workforce before these became popular, so I never had any real life experience with them.

These look like a couple of decent explanations:

Clark Howard used to mention these occasionally on his show. Sounded like the basic premise is to contribute to a “non-deductible IRA” & then “roll it over” into a Roth.

Not sure if you have to wait til the next tax year or if you can do it on the spot, automatically, etc.

I believe you can open a backdoor Roth now, contribute $6000 for 2020 and another $6000 for 2021. Jim probably knows for sure.

I wish I had thought about this stuff 25 years ago but at 52 I’m not sure it makes sense to do this now. I’m a few years from retirement and I’m set up otherwise…I don’t think $6,000 a year will move the needle for me.

Sorry I guess it’s called a mega back door Roth.

It has three parts. Pre-tax, Roth and after tax. That’s the part I haven’t figured out is after tax vs Roth

These are tied to a 401k. That’s what i find confusing.

Sorry, I’m late to the party. Maybe you figured it out already, but if not, there are two different things being discussed here, the “backdoor” Roth IRA, and the “mega backdoor” Roth IRA. Clark has most likely talked about the backdoor Roth, not the mega backdoor Roth (but I admit I haven’t heard Clark’s voice for many years).

The backdoor Roth is really two things: a contribution to a traditional IRA, and a Roth conversion. The traditional IRA contribution is not deducted on Form 1040, and is therefore post-tax. The conversion to a Roth IRA can be done any time by paying the tax on the gains (if any). I’ve been doing this for a few years because I don’t qualify to deduct traditional IRA contributions and don’t qualify to contribute to a Roth at all anymore. I contribute the annual max to my traditional IRA on, say, January 5, and then convert that to a Roth on January 6. From January 6 until the next year, my traditional IRA has a zero balance. Anyone can do it this way, and some blogs I read recommend it if you are anywhere near the limits for Roth contributions.

The mega backdoor Roth adds another layer: your employer’s 401k, which can allow employees to make post-tax contributions over the $19,500 pre-tax amount, plus in-service transfers to a traditional IRA. I’ve never had a 401k that allowed that, so my knowledge is theoretical on this. But essentially, you make a non-deductible contribution up the IRS limit (something like $56k total for pre-tax plus employer match plus post-tax). Then you roll that post-tax amount over to a traditional IRA (a tax-free transaction). Then you convert that traditional IRA to Roth (and pay taxes on any gains).

If you try to do either of these with other money in a traditional IRA, it will not work right (search for the “pro-rata rule” if you care).

Physician on Fire linked above is a good resource for the backdoor Roth, as is
Dr. Dahle did a podcast on the mega backdoor Roth:
Understanding the Mega Backdoor Roth IRA - Podcast #127 | White Coat Investor
I haven’t listened to that one because I’m not in a position to use it myself, but he knows his stuff. If your 401k is set up to let you do a mega backdoor Roth, and your budget can support the contributions, it seems like a great way to fund a Roth.

That’s the part I don’t understand.

We have three buckets to put money.

After tax.

My company match 1200 a year.

So what is the value of after taxes?

Usually it’s that while the contributions are after tax the growth is not taxed. In the pre-Roth days I had an employer that allowed a 3% after tax contribution to one’s 401k and the growth was not taxed. I don’t know if that would still be allowed.

The $1,200 company match is pre-tax. The first $19,500 you contribute is either pre-tax or Roth, depending on what you select. Anything else you put in is after-tax. That’s the part that could be used for a mega backdoor Roth.

Sounds like it is.

If you make after-tax (but not Roth) contributions, and leave them there without doing a Roth conversion, then any gains on those contributions will be taxable as income when you withdraw them. The Roth conversion would make subsequent gains tax-free. Thus, it’s probably not a good idea to make after-tax contributions unless you can do a Roth conversion.

That’s the party I find confusing. We just received documentation to read. I need to sit down and read it. Otherwise it appears in just putting money up that I could put somewhere else

I wonder if you mean in-service conversion.

I think of back door meaning contributing after tax than converting to a Roth.

You need to be able to do either an in-service transfer to a traditional IRA or a conversion within the plan from pre-tax to Roth. If you can’t do one of those two things, then you’re better off investing elsewhere and paying capital gains tax rates, instead of income tax rates, when you withdraw.