Forget the Backdoor Roth IRA: Here’s How to Contribute $35,000 a Year Into a Roth IRA

Jay Gershman |

You might have read about how anyone could sneak $5,500 a year into a Roth IRA—even if exceeding standard income limitations—through a technique known as the backdoor Roth IRA. But did you know there is an even trickier technique out there that allows some lucky people to contribute up to $35,000 a year into a Roth IRA? Given the larger size and to differentiate it from the typical backdoor Roth IRA, some have started calling this technique the “mega backdoor Roth IRA.”

What backdoor?

This year, income limits prevent individuals making more than $130,000 a year or a married couple making more than $190,000 to contribute directly to a Roth IRA. However, in 2010, income restrictions were removed from Roth conversions, which opened up a “backdoor” to allow anyone to contribute to a Roth IRA, either directly, or indirectly through the backdoor Roth IRAmechanism.

Using the same strategy, some people have been able to contribute up to $35,000 a year indirectly to a Roth IRA or Roth 401(k) through the mega backdoor Roth IRA strategy (in addition to the $5,500 a year through the backdoor Roth IRA technique).

How to supersize your Roth IRA contributions

Unlike the backdoor Roth IRA, which anyone can utilize, the mega backdoor Roth IRA only works with certain retirement plans. To see if you’re eligible, you’ll need to read your retirement plan documents or check with your benefits department to see if your plan has two key features:

1. Putting money in

Across pretax, after-tax, and employer match contributions, the total amount that can be contributed to your 401(k) plans cannot exceed $53,000 for 2016. Yes, $18,000 is the deferral limit for employer 401(k) plans, but a person can also potentially set up a solo 401(k).

The first piece of the mega backdoor Roth IRA strategy is being able to contribute after-tax monies. Assuming your employer plan allows these types of contributions, but doesn’t offer 401(k) matches, then you could contribute up to $35,000 in after-tax contributions a year ($53,000 minus $18,000 pretax/Roth contributions).

Unfortunately, only certain plans allow employees to make after-tax contributions above and beyond the $18,000 maximum contribution for 2016. For Vanguard-administered plans, that figure is at less than 20%.

2. Getting the money out

If your company 401(k) plan allows after-tax contributions, you’re halfway there. But the strategy doesn’t work that well if you can’t get the money out and convert it to a Roth 401(k) or Roth IRA. You’ll need to check if your plan allows in-plan Roth conversions or in-service withdrawals.

Both mechanisms allow you to get your after-tax money out of your 401(k) account and into some type of Roth vehicle. In-plan Roth conversions allow you to convert your after-tax 401(k) contributions to a Roth 401(k) within the plan while you are still working for your employer. In-service withdrawals allow you to withdraw your after-tax contributions and convert them into your Roth IRA outside of the plan while still working for your employer. If you have either feature, you’re good to go.

Of the 4,700 plan sponsors served by Vanguard, just 10% of those plans offer the in-plan Roth conversion feature. So consider yourself lucky if your plan offers both after-tax contributions and in-plan Roth conversions or in-service withdrawals.

Even though it’s not available to everyone, the mega backdoor Roth IRA option is a strategy certainly worth considering if it’s available to you. Jim Dahle, personal finance expert, doctor, and author of the White Coat Investor, thinks the mega backdoor Roth IRA is a fantastic option for the retirement investor who has it available.

“It equals more money in a retirement account, boosting returns, lowering taxes, facilitating estate planning, and improving asset protection when compared to a taxable account,” he said.

Is the mega backdoor Roth IRA for you?

Before executing either the backdoor Roth IRA or mega backdoor Roth IRA, it’s important to make sure you’re making the maximum contribution to your pretax or Roth 401(k) to get the full employer match (free money).

Once you’ve maximized your standard 401(k) contribution, you can begin to think about the backdoor Roth IRA strategies.

If your 401(k) doesn’t have the features that allow you to do the mega backdoor Roth IRA, you can still utilize the backdoor Roth IRA to get $5,500 per year into a tax-free account. If your 401(k) does have the features that allow you to do the mega backdoor Roth IRA, it could be a good opportunity for you to increase your retirement savings significantly, diversify your retirement accounts from a tax perspective, and save on future taxes.