Backdoor vs Mega Backdoor Roth - Comparison - YouTube

... And I want to shove even more money into tax  advantaged accounts to save for retirement! All  

right we're going to hear more from that guy in  a minute. The purpose of this video is to explain  

two tax tricks related to retirement savings in  the United States that have very similar names:  

the Backdoor roth and the Mega backdoor roth,  but they're actually very different operations.  

Now these are not official terms. These are  just slang terms that people use as shorthand  

to describe multiple step maneuvers. Both of these  terms (backdoor roth and mega backdoor roth) seem  

to have caught on on the internet when people  discuss these techniques, so they're convenient  

for searching and quickly describing what you're  talking about. But you will not find these terms  

in any official IRS documentation! Also make sure  you listen to the disclaimer at the end of this  

video. This video is for general information  only; not tax advice! I'm just giving you the  

gist of these mechanisms. There's also all sorts  of exceptions that may apply in your case. Now  

let's hear a personality profile of someone who's  going to take advantage of the backdoor roth,  

and then we'll hear a personality profile from  someone who wants to use the mega backdoor roth.  

I'm just a regular person and i  would love to be able to contribute  

up to six thousand dollars to a roth ira this  year to reduce taxes on my retirement savings,  

but I can't because i make more than the  income limit! My roth ira contributions  

are limited (or completely not allowed) by  the irs if I'm single and make over $125,000  

or if i'm married filing jointly and we make  over $198,000. All I want to do is contribute  

up to six thousand dollars to an ira. I'm the type  of guy that wants to do a MEGA backdoor roth ira.  

I'm already saving a crap ton of money for  retirement, I already contribute the annual  

maximum to an ira ($6,000) and I maxed out the  contributions to my employer's retirement fund,  

my 401k. That's another $19,500 and I want to  shove even more money into tax-advantaged accounts  

to save for retirement before I start thinking  about a regular taxable brokerage account.  

All right now that we have the profiles of the  types of people interested in both of these two  

maneuvers, let's walk through diagrams that  show exactly how they work. But in both cases  

I already have other more in-depth videos on each  of these maneuvers, so this is just a high-level  

introduction so that you can keep them straight in  your mind. For the backdoor roth ira contribution,  

you would love to be able to put money (up to  $6000) directly into a roth IRA, but there is  

a contribution income limit and if you make over  this limit you cannot contribute to a roth ira.  

Now you could contribute your six thousand dollars  to a traditional IRA. Typically the whole point  

of a traditional ira is to be able to take a  tax deduction, making that money effectively  

pre-tax. But there's also an income limit on the  ability to take that tax deduction, and if you're  

above the income limit for a roth IRA you're  almost certainly above the income limit to take a  

deduction for your contributions to a traditional  IRA. But you can still put your money in that  

account, and then once it's in the traditional  IRA you can convert it over to a roth IRA this  

is where the origin of the backdoor phrase comes  you're getting into the roth IRA via a conversion  

from traditional IRA, not via a contribution.  So the backdoor roth is an option for just about  

anybody who wants to contribute up to $6,000 into  an IRA to take advantage of those tax savings (as  

opposed to just investing in a brokerage account)  but would otherwise be unable to because they are  

above the roth IRA income limit or the traditional  IRA deduction income limit. That's very different  

from a mega backdoor roth. This is for someone  who's already maxed out their 401k with their  

employer. They've contributed $19,500 to either  their pre-tax (their regular traditional pre-tax)  

or roth 401ks with their employer. They've also  likely already contributed $6,000 to a roth IRA  

(maybe via the Backdoor method) and they want to  get even more money into tax advantaged accounts.  

There's another little-known bucket of  contributions to your 401k called the after tax  

non-roth. It's still part of your 401k, but it's  like a different bucket inside your 401k and it is  

not subject to the $19,500 annual limit. In fact  you can contribute up to $38,500 in this bucket  

for a total of $58,000 in your entire 401k. Now  there's exceptions to that (see my other video)  

so this is really for people who want to save  a ridiculous amount of money in tax advantaged  

accounts. So when you put money in this bucket  there's a special provision that allows you to  

roll that money out into a roth IRA. Why would you  do that? Well typically you don't want money to  

sit in this type of bucket an after tax non-roth  account. You're taxed when you put your money in,  

and you'll be taxed at income tax rates on any  earnings when you withdraw. But as soon as you  

get it over into a roth IRA, it makes tax-free  earnings and tax-free withdrawals forever. It's  

just as if you contributed all of this money  directly to a roth IRA. There's one big downside  

to the mega backdoor roth: Whereas the back  door roth is available to just about anyone,  

the mega backdoor roth is only possible if your  401k account has some very special provisions.  

First of all it has to have the ability to  contribute these special after-tax non-roth  

contributions, and I think less than half of  401k providers allow this type of contributions.  

Plus, to make it really effective, it also  needs to allow these in-service withdrawals  

or in-service rollover to roth IRA (or conversions  to roth 401 k). So the multi-step techniques that  

these terms actually refer to: In the case of the  backdoor roth it is a non-deductible contribution  

to a traditional ira, and then a subsequent  conversion of that money in your traditional  

IRA over to roth IRA. Whereas in the mega backdoor  roth case, it's a contribution to your after tax  

non-roth 401k. They're often just called "after  tax 401k," but i always like to specify "non-roth"  

because roth 401ks are also after tax! Then  after you contribute that after tax, non-roth  

money to your 401k, you can take an in-service  distribution and roll it over to your roth ira,  

or an in-plan conversion to your roth 401k.  Check out my other videos for all the details.  

Alright time for the disclaimer: I am not an  accountant, I am not a certified tax preparer, i'm  

just some dude on the internet this video is for  general informational purposes only it does not  

constitute financial advice or tax advice or any  other professional services please do not sue me  

no fiduciary relationship is formed the  use of any information in this video is at  

your own risk in fact just assume it's wrong  just use it as a starting point to go do  

your own research or consult a APA. But  in the meantime check out my other videos.