Mega Backdoor Roth IRA:  Is It Really Mega?

If you meet the eligibility requirements, you could stash an extra $41,500 for retirement in a Roth IRA. However, it’s complicated, and mistakes can be costly.

Although the mega option is similar to the backdoor Roth IRA, they’re two distinct accounts. Even though they’re both designed for high-income earners to convert a traditional IRA fund to a Roth, they do things differently.

The backdoor option was designed for high-income earners to make a regular Roth contribution using tax-deferred earnings. In contrast, the mega backdoor Roth IRA was designed for after-tax contributions to a 401(k) to convert to a Roth IRA.

You could call the mega backdoor option mega as it offers a more considerable after-tax contribution into a Roth IRA. However, it’s not for everyone. The choice comes with a few limitations.

What Is an Individual Retirement Account (IRA)?

An individual retirement account (IRA) is a savings and investment account with tax advantages. A traditional IRA uses pre-taxed dollars, while a Roth IRA uses after-tax dollars. As a result, they both have tax savings, either now or later.

You can open an IRA through a bank, investment brokerage, or employer. Through employers, IRAs are 401k, Roth 401k, 403b, Roth 403b, Thrift Savings Plan, or SEP (Simplified employee pension).

IRAs are used to purchase stocks, bonds, mutual funds, target-date funds, exchange-traded funds, and more. Employer-sponsored plans may have limited choices. However, many offer employer-matching contributions.

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