Here’s an interesting retirement funding idea that may appeal to some of you. It’s rattled around certain blogs and forums the past few months; as best I can tell it starts here on White Coat Investor, an investing website aimed at doctors. I first saw it on FatWallet Financial, though there’s also some discussion on Bogleheads and on Mr. Money Moustache.
Enough buildup–what is the Mega Backdoor Roth IRA? It’s a clever circumvention of standard Roth IRA funding limits. I’ll quote the original article from White Coat Investor:
Some 401Ks not only permit $17.5K of either tax-deferred or Roth contributions, but ALSO permit you to contribute your own, after-tax money into the plan up to the $52K limit. A good example of this is the TSP for deployed military doctors. It isn’t a particularly good deal to just contribute after-tax money, UNLESS you can then get that money out and convert it to a Roth. Voila- A Mega Backdoor Roth IRA. Instead of only being able to contribute $5.5K per year, all of a sudden you can contribute $34.5K (plus the $5.5K in your personal and $5.5K in your spousal IRA.) If you’re over 50 and put your first $23K (remember the $5.5K catch-up contribution) into a Roth 401K, you could potentially put up to $65K per year into a Roth IRA.
Not everybody can do this. You need to have a certain type of 401k plan:
- The plan must allow for after-tax contributions above and beyond the $17,500 employee contribution limit, preferably up to the $52,000 limit. So you can put in your $17,500 that is either tax-deferred or Roth, then contribute another $34,500 to the plan in after-tax dollars, similar to a non-deductible traditional IRA.
- The plan must allow for non-hardship in-service withdrawals of after-tax contributions.
- The plan should prohibit non-hardship in-service withdrawals of tax-deferred contributions (not mandatory, but a useful feature.)
- The plan should allow for “lump sum” contributions (not mandatory, but useful.)
I’m not sufficiently knowledgeable to comment on whether or not this is a good idea, hopefully Matt or George will weigh in. I just wanted to air it out here since I hadn’t heard of it before. What do you all think about this one?