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.
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.
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.