After-Tax Contributions

Mega Backdoor Roth

Isn’t the IRS great?

Most people imagine the people at the IRS as stuffy, grey-suited, money-grubbing villains but I see things differently. I imagine a bunch of sexy, lab-coated fientists cooking up interesting ways to help us retire even earlier.

Since they are like us, they understand the enjoyment we get out of solving complex problems and they cater to our desire to prove our intelligence by setting convoluted rules and giving conflicting guidance.

Sometimes, however, when things are particularly fuzzy and even the best financial minds are unable to agree on an appropriate interpretation of the rules, they pat us on the back of the neck and say, “It’s all going to be okay.” September was one of those times.

Mega Backdoor Roth

People have been asking me about something often referred to as a Mega Backdoor Roth. I spent quite a bit of time researching the strategy (which is described below) but since the IRS rules didn’t clearly give the green light, I decided not to write about it.

At the end of September, however, the IRS released Notice 2014-54. Not only did the notice clear up some of the questions I had but it also seemed to give the go-ahead for another excellent tax-avoidance strategy we can add to our ever-growing arsenal. This particular strategy could allow us to make an additional $35,000 in Roth IRA contributions ever year!


Before I dive into the strategy, some background info is required.

When contributing to a 401(k)/403(b), there are three different types of contributions that you can make:

Pre-tax Contributions

The first type of contribution is a pre-tax contribution. If you have a normal 401(k), the amount that automatically gets contributed from your paycheck is a pre-tax contribution. The limit on the amount of pre-tax contributions you can make in 2015 is $18,000.

If your employer matches some of your contribution or puts any money into the account for you, these contributions are also pre-tax but do not affect the $18,000 annual personal limit.

Pre-tax contributions to a 401(k) are tax-free going in and they grow tax free but you have to pay tax on the money when you withdraw it at ordinary income tax rates.

Roth Contributions

If you have a Roth 401(k) instead, the contributions you make are considered Roth contributions.

Roth contributions are made with after-tax money (i.e. you paid tax on the money before putting it into the Roth) but the contributions are allowed to grow tax free and all principal and earnings can be withdrawn tax free when you reach standard retirement age.

After-Tax Contributions

The least-known type of contribution you can make is an after-tax contribution. After-tax contributions are made with money you’ve already paid tax on (like Roth contributions) and the contributions can grow tax-free (like both) but all growth will be taxed upon withdrawal.

Depending on how much your employer contributes to your retirement account, you could potentially contribute up to $35,000 extra into your 401(k) every year with after-tax contributions. The total 401(k) contribution limit for 2015 is $53,000 so to figure out how much in after-tax contributions you could make, simply subtract your pre-tax/Roth contributions and your employer contributions from $53,000. For example, if someone maxes out their 401(k) in 2015 and their employer contributes $6,000, the after-tax contribution limit would be $29,000 ($53,000 – $18,000 – $6,000 = $29,000).

401(k)/403(b) Contribution Limits

So why are after-tax contributions suddenly a lot more appealing?

IRS Guidance

With Notice 2014-54, the IRS has stated that when transferring money from you 401(k) into your IRAs, you can easily divert the pre-tax portion of your 401(k) and all the investment growth to your Traditional IRA and the after-tax portion to your Roth IRA, without paying any tax.

Bonus: To keep track of all of your tax-advantaged account balances, click here to download a free copy of the spreadsheet I used on my own journey to financial independence!

This is a big deal for people who can make in-service distributions (i.e. 401(k)-to-IRA transfers while still employed) or those of us who plan to leave full-time our employer soon because this will allow us to dramatically boost our Roth IRA contributions!


Assume that you read my article on front-loading and on January 1st, 2015 you decide to max out your pre-tax 401(k) contributions, you convince your employer to contribute $6,000 immediately, and you max out your after-tax contributions as well (far fetched, I know, but it will make the example easier to understand).

Here’s what your 401(k) would look like on January 1st:

401(k)/403(b) Contribution Limits

Next, assume you just leave it there and when you eventually leave your job, you find that the market has increased your 401(k) balance by 30%!

Here’s what your 401(k) would now look like:

401(k) After Growth

Since all pre-tax contributions and all growth within the 401(k) will be taxed, here’s all the money that would be subject to tax once you decide to tap into the account:

401(k) Taxes

As you can see, you don’t really have tax-free gains on the after-tax contributions, you have tax-deferred gains instead, since you’ll eventually have to pay tax on the money. Since those gains could have been taxed at lower long-term capital gains rates had they been invested in a normal taxable account but now they’ll be taxed as ordinary income instead, you can understand why you probably haven’t heard of after-tax contributions before.

Now that the options for after-tax contributions are much better, let’s take a look at a better way to handle the after-tax contributions.

Assume the same scenario but rather than leave everything in the 401(k) to grow, you instead immediately rollover your entire balance to two separate IRAs using an in-service withdrawal on January 2nd, 2015. According to the new guidance, the pre-tax contributions can go directly into a Traditional IRA and the after-tax contributions can go directly into a Roth IRA.

Here’s what your accounts would look like when you finally decide to take your money out:

401(k) to IRA Conversion

You can see that the gains on the after-tax contributions that would have been taxed in the initial scenario are now protected in the Roth IRA and will be tax free whenever we decide to withdraw the money!


If you are already maxing out your pre-tax 401(k)/403(b) contributions (see this post for why I believe a pre-tax contributions are better than Roth contributions for future early retirees) and are also maxing out your IRA, you should check with your 401(k) custodian to see if you can start making after-tax contributions as well. Thanks to the new IRS guidance, making after-tax 401(k) contributions will effectively allow you to contribute up to $35,000 extra to your Roth IRA every year (in addition to the normal $5,500 IRA contribution limit)!

If you are able to perform in-service withdrawals, you can minimize the amount of growth that takes place before the conversion, which will shield even more of your money from taxes.

What do you think? Do you have the ability to make after-tax contributions? How about in-service withdrawals? Sadly, my plan doesn’t allow either so I won’t be able to take advantage of this incredible tax-avoidance strategy but hopefully many of you will.

Related Post

HSA - The Ultimate Retirement Account

A Health Savings Account (HSA) is the ultimate retirement account because it provides the best benefits of a Traditional IRA and a Roth IRA in one account!

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  4. Reduce or eliminate those expenses and achieve FI even sooner!

181 comments for “Mega Backdoor Roth

  1. Eric (brooklynguy)
    November 20, 2014 at 11:50 am

    Great write-up, MF. One additional and important point is that the new guidance also clarifies that you can split off the earnings from the after-tax 401k account and send them into a traditional IRA (while sending the contributions to a Roth IRA). This is important for people who don’t have the ability to take in-serve distributions. In addition, I believe for some frugal aspiring early retirees, the approach of letting earnings build up in the after-tax 401k account and then separately rolling the earnings into a tIRA (instead of taking immediate in-service rollovers into a Roth IRA) may be the optimal strategy, because that still shelters the earnings from taxes during the high-income earning years, but allows earlier access to those earnings (as early as five years after retirement, if you fold them into a Roth conversion pipeline immediately upon retirement)–and the loss of Roth tax-avoidance on those earnings during retirement does not matter to the frugal early retiree who isn’t subject to taxes in any event. We were having a debate about this recently over in the MMM forums.

    • ethan
      November 26, 2014 at 1:09 pm

      Can you point to a source that says you can convert the gains on your after-tax 401K to a Traditional IRA (and thus defer taxes even longer). I’ve talked to my plan administrator and Vanguard and nobody had seen/heard of this provision in the IRS Clarification 2014-54.

      What each of them said is that any contributions made to the after-tax 401K can be converted to a Roth IRA, but gains on these funds would be taxed once I requested the rollover.

      Appreciate the help and/or source for this information. Thanks!

      • Eric (brooklynguy)
        November 28, 2014 at 9:26 am

        The source is Notice 2014-55 itself, which says that in a situation where there is a direct rollover
        to two or more plans, “then the recipient can select how the pretax amount is allocated
        among these plans. To make this selection, the recipient must inform the plan
        administrator of the allocation prior to the time of the direct rollovers.” (Example # 4 in the Notice illustrates this in the situation where the direct rollover is done to a Roth IRA and a traditional IRA.) When you take a distribution from an after-tax 401k account, the portion representing contributions is “after-tax” and the portion representing gains is “pretax,” so you can apply this guidance in the context of a rollover of funds from an after-tax 401k account to allocate the amounts accordingly between a Roth IRA and a traditional IRA. The IRS guidance is still new and hasn’t been implemented yet by all plan administrators, but the transition rules at the end of the guidance make it clear that you can rely on the guidance immediately (and even retroactively).

        • Ethan
          November 29, 2014 at 9:41 am

          Thanks for the quick reply. I read through the example, and it’s still a little unclear to me. The problem is that in my plan I have a pre-tax 401K (Traditional 401K) and then the after-tax voluntary option. I understand that the gains from the securities in the after-tax voluntary are technically pre-tax, but they are not in a pre-tax account.

          Each person I spoke with was aware of 2014-54, but none of them interpreted the gains in the after-tax voluntary account as transferable to a traditional IRA under this rule. Since it is still early days, I hope there will be more case examples or clearer language/examples to make this easier to understand.

          Thanks again!

          • The Mad Fientist
            November 30, 2014 at 4:23 am

            Hi Ethan, as Eric said, the new guidance specifies that you can direct your pre-tax contributions and the earnings on all of your contributions to your Traditional IRA while directing only the after-tax contributions to your Roth IRA. Whether your 401(k) custodian makes that an easy task for you or not, that’s another story. If I were you, I’d probably just keep calling until you get someone who really knows what they’re talking about. As Eric mentioned, this ruling is very new so maybe some administrators haven’t caught on yet but even if yours hasn’t, I’m sure it will eventually. Good luck!

        • vinod
          January 10, 2015 at 11:23 pm

          Hi – I am little confused by this article too. I can understand that the IRS guidance says that after tax contributions can be rolled over to a Roth IRA. The guidance does not appear to state the the “gains from the after-tax contributions can be rolled over to a Roth IRA.
          The pictures in the article itself seem to imply that both after-tax contributions and its associated gains can be rolled over into a Roth IRA – which I don’t think is true.

          Great article, but can you please clarify?

          • Scott
            January 15, 2015 at 8:52 am

            There are two accounts in a 401(k):
            1. Before-tax contributions, before-tax gains, after-tax gains (non-Roth)
            2. After-tax contributions, Roth after-tax contributions, Roth after-tax gains

            The first account can be rolled over into a traditional IRA without tax implications. The second can be rolled over into a Roth IRA without tax implications.

          • seattlecyclone
            January 15, 2015 at 11:16 am

            The new guidance says you can split up the withdrawal so the gains go into a traditional IRA and the principal goes into the Roth IRA. The guidance doesn’t say anything about converting the gains to Roth because that isn’t a new thing. Putting the gains into your Roth IRA has previously been allowed as long as you’re willing to pay tax on them that year, and is still allowed today.

    • The Mad Fientist
      November 30, 2014 at 4:18 am

      Good points, Eric! I should put together a calculator or something to help people plan their Traditional-to-Roth conversions so that they know how long it will take to convert, how much tax they’d have to pay, how much they can withdraw every year, etc. That way, they can determine whether they should do the rollover as soon as possible or, as you suggested, wait so that they could access the after-tax earnings earlier, if needed.

      That sounds like an interesting debate you were having over on the MMM forums so feel free to link over to the thread so that people (me included) can check it out!

      • Eric (brooklynguy)
        November 30, 2014 at 9:11 pm

        That sounds like it would be a powerful tool if you could do it! There are a ton of variables at play though.

        Here’s the link to the thread I was referring to:$35kyr-of-tax-free-growth-saving-space/

        • The Mad Fientist
          December 4, 2014 at 5:03 am

          Yeah, I haven’t thought about how I’d do it yet but it would be cool if I could come up with something useful!

          Thanks for the link to the forum post. I’m going to go check it out now…

          • Dustyn
            July 29, 2015 at 8:32 am

            Yes! A calculator would be great. I understand the post but it seems like a heck of a lot to keep track of between tax paperwork and tracking everything, then using this to actually help plan if retirement can happen earlier.

      • Eric
        January 3, 2017 at 10:13 am

        I know this thread is a bit old, but now it pertains to me so I have a question!

        I have spent the last couple of years paying off ~$100k in student loan debt (I’m 32) but now am ready to put retirement savings into my main financial focus. I currently have ~$50k in my 401k (no match, but profit sharing that comes out to ~$7k/yr) – of that amount there is $5500 in the after-tax (non-Roth, not offered) portion.

        Here are my questions:

        I make $160k/yr and will be getting a ~$36k bonus check in early February. I have been reading a lot on the MBR strategy and I want to partake since I cannot make Roth IRA contributions. My knee-jerk reaction was to front-load my pretax 401k (50% max contribution rate would put me right at the $18k limit here and not too concerned with DCA at my age/in this scenario) and then use my remaining salary for the year to fund the after-tax 401k at 15% or so. I have the ability to make in-service withdrawals and would likely do so every month as to minimize non-Roth protected growth.

        After doing some reading, I am now a little confused as to how a different scenario would work out – that is to skip the pretax 401k all together, put the 50% into the after-tax portion, roll this over to Roth immediately, and then max out the $53k/yr limit (minus profit sharing) all with after-tax contributions to be MBR’ed in a Roth IRA. Is this legal? If so, worth doing?

        The second, smaller question is if I roll over the ~$5.5k I already have in the after-tax portion of my 401k as well this year, that shouldn’t count toward any contribution limits correct?

        Thanks all for any help you can provide!

        • Howard
          February 1, 2017 at 2:57 pm

          Eric – I can only answer one part of your post, but you can make Roth IRA contributions, via the backdoor method ( Income limits don’t apply.

          I did this for years, until I made the mistake of rolling over a previous employer’s 401k to a rollover IRA. I could still do the backdoor conversion, but I would end up getting taxed on a portion of that, which doesn’t make it worthwhile.

        • lsui
          February 21, 2017 at 8:48 pm

          Eric, first you need to find out if your employer 401k plan allows you to have after-tax contributions, as some plans don’t and some have limits lower than what IRS allows. Second, you need to evaluate pre-tax 401K vs. Roth, and the most important determining factor is your tax rate between now and after you retire. If you believe your tax rate is higher now than what it will be in your retirement (when you withdraw the money), then it is better to pay tax later, therefore pre-tax contribution is better, and vice versa.

          I am lucky that my employer’s 401K plan is probably the most flexible out there, I can tell you how it works for me. I front load my 401K each year, directing 100% of my pay to pre-tax and after-tax 401K, until it hits the IRS limit ($54K in 2017 including employer match). My employer matches 50% of pre-tax (or Roth 401k) contributions, and it vests as soon as it hits the account. So I get it at the beginning of the year and it has nearly a full year to grow. For after-tax contribution, the plan offers in-plan Roth conversion (through Vanguard), so I just click a few buttons and the after-tax money becomes Roth asset in my 401K. I could leave it there to grow tax free, but I chose to transfer it to my Roth account at Fidelity so I have full brokerage investment choices, and it takes a phone call to Vanguard to do that. To minimize the number of phone calls to Vanguard and the hassle, I contribute 100% pay and annual bonus in the first few months, so it does not spread through the whole year.

    • Paul
      April 15, 2015 at 2:29 pm

      Has anyone had any issues with Vanguard in doing this rollover from a non-Vanguard 401k? Basically I started funding my after-tax in my 401(k) every two weeks to the maximum that my company allows. The next day after each pay day I take an in-service withdrawal and they send me a check in the mail to Vanguard as requested. I then send this check to Vanguard with a letter explaining to add these funds to my Roth IRA and every two weeks Vanguard calls me up to confirm that I really want to do this warning me that this will be a “taxable event” and I need to be careful and contact a tax professional. Am I misunderstanding this new rule and doing something wrong or do they just not understand this new law do you think?

    • August 23, 2016 at 12:02 pm

      I am not entirely sure of the benefits of after tax 401(k). While the gains may grow tax deferred, it is not much different from an after tax investment account where you can also let the gains compound tax free as long as you don’t sell the assets. Sure, there will be dividends along the way that are taxable but choosing an index fund with reinvest option would still give an investor lot of flexibility with a regular after tax mutual fund or brokerage account for these additional savings. If there is a likelihood of higher tax rates in the future, then having sizable assets in after tax accounts is better than relying mostly on tax-deferred accounts in my view.

      • Amanda M
        August 24, 2016 at 4:16 am

        It is because of this: According to the new guidance, the pre-tax contributions can go directly into a Traditional IRA and the after-tax contributions can go directly into a Roth IRA.

        Do you think that Roth investments are worth it? Making your investment growth tax free? With my former employers plan, I could roll out after-tax 401k investments into a Roth IRA every 6 months. This meant that instead of the $5,500 limit, I could put more than $25,000 into the Roth IRA every year. That seems like a pretty great benefit to me, but your employers rules may vary.

  2. Mike
    November 20, 2014 at 11:55 am

    Is this type of rollover subject to the 5 year delay for withdrawal like the traditional IRA to Roth IRA conversion?

    • November 21, 2014 at 7:47 am

      I asked my 401k plan administrator this question. She did seem to think that, at least for in-service post-tax rollovers, that the 5 year seasoning is still required for withdrawal of that lump sum rollover. From what I’ve read so far in the IRS regs, that seems to be the case.

      As always, check with your accountant before taking internet advice though :-) This is all still pretty fluid.

      And if you don’t have an accountant, asking prospective accountants about their opinions / recommendations of this sort of rollover is a great filter for those who keep up with this stuff vs. those who aren’t paying attention. It’s harder than I thought to find a modern accountant who was interested in helping my with tax strategy. But they do exist!

    • Eric (brooklynguy)
      November 21, 2014 at 9:16 am

      Yes, a rollover from an after-tax 401k account to a Roth IRA is subject to the same five year holding period before you get penalty-free access the funds as a conversion of a traditional IRA to a Roth IRA. Take a look under “Additional Tax on Early Distributions” in IRS Publication 590:

      Also, be mindful of the ordering rules (discussed in the same IRS publication) that force you to withdraw funds from a Roth IRA in a particular order (which in turn determines the tax and penalty treatment of each withdrawal). So if you do a mega backdoor Roth rollover, but your existing Roth IRA already has other funds in it that the ordering rules will force you to withdraw first and that are subject to penalty, you will not be able to access the funds from your mega backdoor Roth rollover without first withdrawing (and paying the penalty on) those preexisting funds.

    • seattlecyclone
      November 21, 2014 at 4:39 pm

      The five-year rule does apply, but an important thing to note about it is that the 10% early withdrawal penalty only applies to money you paid tax on at the time of the Roth conversion. If you use this new guidance to split your rollover so the after-tax principal goes to your Roth IRA and the tax-deferred earnings go to your traditional IRA, you could withdraw the principal from the Roth at any time with no penalty.

      However you need to take this in the context of any other Roth conversions you have made in the past. There’s a set of ordering rules that determine what money comes out of the Roth IRA first for the purpose of calculating taxes and penalties on that money. Direct contributions always come out first and are always tax-free and penalty-free. Then rollovers come out (first in, first out). So if you paid tax on a traditional-to-Roth conversion two years ago and you rolled over some after-tax money this year, you wouldn’t be able to get the after-tax money back until you first withdraw the money you rolled over two years ago and paid any applicable penalties on those funds.

      • MathGuy3021
        August 17, 2016 at 10:39 pm

        Thank you for clarifying this. I was not sure how the 5 year conversion rule would apply in this after-tax 401(k) contribution to roth ira rollover case since there are no taxes paid at the time of the rollover. So basically even though the 5-year conversion rule applies, if you take out the roth ira money corresponding to the after-tax 401(k) rollover within the first 5-years, there should be no taxes whatsoever. This is a great way to boost the roth ira balance.

  3. Fubek
    November 20, 2014 at 12:26 pm

    Thanks for this article. I have one question: normal contributions to a Roth IRA are only allowed when one does not exceed a certain income level. Does this also apply to the 401(k) -> Roth IRA conversion? Any limits here? Thanks! F

    • The Mad Fientist
      November 30, 2014 at 4:27 am

      Hi Fubek,

      No, the income limits don’t apply to these types of conversions!

  4. flyingcircle
    November 20, 2014 at 12:40 pm

    From what I’ve read elsewhere, if you have after-tax gains in your current 401k, they can be rolled into your traditional IRA. So if you couldn’t roll over while employed, you could still put the $8,700 in your example into a tax advantaged account. Am I on the right track with that?

    • The Mad Fientist
      November 30, 2014 at 4:34 am

      Yes, you are right about that but the sooner you can roll those funds into the Roth, the less amount of tax you would need to pay on those gains (since gains in a Traditional IRA are eventually taxed, it’s better to have those gains be in a Roth instead so that they aren’t taxed). If you can’t do in-service withdrawals though, then waiting until you leave your job and then just putting those after-tax earnings into a Traditional IRA is the way to go.

  5. Dorothy
    November 20, 2014 at 12:42 pm

    Thanks for this intel! I’m maxing out my pre-tax 403(b) contributions and my backdoor Roth. As soon as I read this post, I called my 403(b) administrator and learned that after-tax contributions are allowed but not in-service rollovers. I plan to stay with this employer 5-7 years until FIRE. I wonder if I should take advantage of this strategy or if the inability for in-service rollovers would result in 1) too much tax on the growth as income at withdrawal and/or 2) too much risk that the Roth rollover would no longer be an option in 5-7 years. I’d be grateful for any thoughts.

    • Dorothy
      November 20, 2014 at 1:43 pm

      On second thought, of course, my first question is not an issue as long as the Roth rollover is available at the time I separate. So that is my one concern.

      • The Mad Fientist
        November 30, 2014 at 4:37 am

        Hi Dorothy,

        If I were you, I’d still take advantage of it because you won’t accumulate too much in 5-7 years and what you do accumulate can just go into your Traditional IRA. As far as the risk that the rollover option won’t be available in 5-7 years, your guess is as good as mine but I tend to avoid trying to predict the future and instead just optimize things based on the rules available at the time. If things change, I’ll work on optimizing using the new rules then.

  6. BB
    November 20, 2014 at 1:11 pm

    I think having some graphs which compare a couple different strategies (compared to taxable account alternative), over time, like in your previous posts below, would have more impact on how great this could be for FI-seekers.

    • The Mad Fientist
      November 30, 2014 at 4:41 am

      Good idea, BB. I thought the complicated nature of this topic required a more detailed explanation so I decided to omit those comparison graphs in favor of the graphs that you see above. It seems a lot of people are interested in this idea though so maybe I’ll do a follow-up post and include the type of graphs you suggested. Thanks for the suggestion!

  7. BB
    November 20, 2014 at 1:33 pm

    Also, in your research, did you see a need to ever do a “roll-in” to avoid any tax complications or headaches (if you already have other trad/roth IRAs)?

    • The Mad Fientist
      November 30, 2014 at 4:42 am

      I’m not sure I understand your question. Can you elaborate?

      • BB
        November 30, 2014 at 9:29 pm

        I can’t find the exact context and link I was thinking of.. but pretty sure it relates to the “pro rata rule.”

        • Nicklaus
          December 3, 2014 at 5:09 pm

          BB, you might be referring to rolling funds from an existing Traditional IRA into a qualified plan (i.e. 401k) to take full advantage of the backdoor Roth IRA contributions. By completing a rollover of the Traditional IRA into a qualified plan, you avoid the negative consequences of the pro-rata rules for Traditional IRA’s (i.e. more taxable income) when you convert a nondeductible Traditional IRA contribution to a Roth IRA. The pro-rata allocation is determined as of 12/31 each year so you would need to complete the rollover to the qualified plan by this date. You might check with your plan administrator to make sure they allow rollovers from Traditional IRA’s (Roth IRA’s are not permitted). This could allow you to take advantage of the backdoor Roth IRA contributions and mega backdoor Roth IRA contributions in the same year, depending on your situation. What do you think, Mad Fientist?

          • The Mad Fientist
            December 4, 2014 at 5:08 am

            As always, Nick, your answer is clear and intelligent so thanks for chiming in!

          • BB
            December 4, 2014 at 7:24 pm

            Great! Thanks for the info. It should help others who want to do both bakdoors (they must be extremely lucky to take advantage!)

            Initiating a rollover into my 401k from my tIRA now. 401k has some nice investment options and this should allow me to do do a backdoor Roth IRA if I am so inclined. Unfortunately not able to do a mega backdoor Roth IRA.

          • Jamie
            March 10, 2015 at 11:25 pm

            Nick, would you mind translating this for those of us who may not be at the expert level? I don’t know what the pro-Rata rules are. I am currently contributing to a non deductible Ira and rolling it into a Roth each year. Sounds like I could be doing something better? Or is the pro-Rata the calculation of what % of your funds are taxable vs non taxable? If so, I’d love more detail. I understand that total traditional Ira funds are divided up into what % are tax deductible and what percent are not. Then that percentage is applied to whatever portion you roll into a Roth. So you owe tax on some percentage of your rollover.

            Does rolling it into a 401k change that? OH!!!!! Are you saying that you can roll any tax deductible traditional Ira into a 401k that then only the non tax deductible is left and you can roll that into a Roth without any additional taxes due??

            Only possible downside I see there is the typically more limited investment options available in 401ks and the potentially higher fees. But if your plan allows in service withdrawals you could just take it back out every year.

            You’re brilliant!! Let me know if I am understanding correctly and please correct me if I’m off.


            Also I have one big question. Somewhat unrelated. What about the total dollar limitation? I saw it was a little over 1M. Exactly what does that apply to? Your aggregate retirement funds? Just your Roth? Is it as a married couple or as an individual? Is it contributions or total value (including dividends and capital gains?). What happens if you exceed it? Would the tax benefits stop? Would I owe some kind of penalty? I am not near this limit right now but if I start amping up all these techniques it wouldn’t take long … I am especially concerned about contributing now, and letting it sit, and then having it become huge as it is likely to become if untouched over a long period of time.

  8. Nick
    November 20, 2014 at 1:39 pm

    Well said, always enjoy reading your posts! Nice work, Mad Fientist!

    • The Mad Fientist
      November 30, 2014 at 4:42 am

      Thanks a lot, Nick!

  9. Kurt
    November 20, 2014 at 1:57 pm

    What’s your opinion on funding your tax advantaged accounts via funds from a taxable account in “cash short” years?

    Due to a few unanticipated expenses, I was short of the cash to contribute to tax-advantaged accounts this year from income, however, would it be smart to make up this difference by transferring funds from a taxable account this year for the tax savings?

    • Kurt
      November 20, 2014 at 2:37 pm

      Also to add to my post. I have a SIMPLE-IRA program at my employer where the account is held at Edward Jones (less than ideal). I currently contribute to the match max (3%). Is it smart to be maxing this account given it is held at EJ? Do the the tax benefits outweigh the expense ratio/fee losses? I have a fear of giving more than the minimum to EJ, though this fear may be irrational given the tax savings.

      For example, $7,000 (getting funds from my taxable account and putting into SIMPLE) at 25% saves $1,750 in taxes, way more than the fees I will incur (in the short-term anyway, though in the long run I fear the fees would catch up with me). I’m looking into a trustee-to-trustee transfer to get the money to Vanguard after a 2 year holding period (from what I’ve read on Bogleheads wiki)

      In addition, the selling of taxable funds won’t trigger additional taxes due as I have enough in “losers”.

      • The Mad Fientist
        November 30, 2014 at 4:51 am

        I should have read your follow-up comment because it answered both of my questions that I just asked you in my response to your first comment.

        As you said, the tax savings will more than cover the fees so if you plan to get out of those funds anyway within two years, it makes sense to lower your taxes by $1,750 and reinvest that extra money in your taxable account. It sounds like you’ll also harvest some losses by selling so the tax savings resulting from those losses can also be invested.

        You still have a month to go before the end of the year so why don’t you try to also sell some stuff you don’t need around the house and then use that to max out your IRA?

        I’d also check again to see if there are any low-cost index funds you can invest in at Edward Jones. Usually these custodians have at least one semi-good offering that you can take advantage of until you move the money to Vanguard.

        Good luck!

    • The Mad Fientist
      November 30, 2014 at 4:44 am

      Kurt, would you be selling the funds in your taxable account at a loss or a gain? Would you be the contributing those funds to a pre-tax account like a Traditional IRA or 401(k)?

  10. kyle
    November 20, 2014 at 2:12 pm

    MF, you never cease to amaze me with how well you find and explain strategies to minimize tax burdens and how to execute a strong plan for financial independence. I wonder how many people at the IRS read your blog and think ‘damn, this guy is good!’

    • The Mad Fientist
      November 30, 2014 at 4:53 am

      Haha, thanks for the very kind words, Kyle! I can’t imagine anyone from the IRS reads my blog but if there is anyone out there, I hope they speak up because I’d love to hear what they think!

  11. November 20, 2014 at 2:34 pm

    I went from being really excited about this possibility, to then immediately sad, as my 401k neither allows for after tax contributions or in-service withdrawals (until I am 59.5).

    Sad face.

    • The Mad Fientist
      November 30, 2014 at 4:54 am

      The same exact thing happened to me, DB40. I was so pumped about this strategy but then after spending 30 minutes teaching the rep I was talking to all about it, he burst my bubble by saying that it wasn’t possible with my employer’s plan :(

  12. Mike
    November 20, 2014 at 3:00 pm

    Can you do the same rollover to your Roth 401k, or does it have to be a Roth IRA?

    • The Mad Fientist
      November 30, 2014 at 5:01 am

      Presumably you could do the same with a Roth 401(k) but if someone out there with a Roth 401(k) has done it, please speak up because I’d be interested in hearing your experiences.

      The rollover would be a bit different because the Roth contributions and their associated earnings would go to the Roth IRA, the after-tax contributions would also go to the Roth IRA, and the earnings on the after-tax contributions would go to the Traditional IRA.

  13. 1dirtypanda
    November 20, 2014 at 3:20 pm

    i literally just got off the phone and moved my aftertax to roth ira, so nice timing on the article!

    why would you move your pretax portion of your 401k over to a Traditional IRA? why not leave it in the Trad-401k (pretax) bucket and just move the Aftertax-401k portion to Roth (401k or ira), especially if you might already have a good 401k plan, with say Vanguard?

    Also, please correct me if i’m wrong, but if you have money in your Traditional IRA then you cannot do the Backdoor Trad>Roth IRA trick without paying some taxes there. (From If you have any other (non-Roth) IRAs, the taxable portion of any conversion you make is prorated over all your IRAs; you cannot convert just the non-deductible amount. )

    • 1dirtypanda
      November 20, 2014 at 3:42 pm

      Also, note when rolling over the AfterTax-401k bucket to Roth IRA, IF you have gains, you may be subject to tax. You can do this: move the aftertax contributions to Roth IRA without penalty AND also move the gains of the AfterTax401k into a Traditional IRA (I just asked Vanguard rep about this). But then you’d have the problem I mentioned previously where you’d have money in a Trad-IRA. In my case, I waited until the end of the year and now I have a small taxable event on the gains that were made this year.

      Best way to minimize tax gains is to contribute to AfterTax401k and then IMMEDIATELY rollover that money into Roth (IRA/401k) such that you don’t have gains to pay taxes on. So for example, if you contribute to AfterTax401k on a monthly basis (monthly paychecks) throughout the year, you’ll have to do the rollover 12 times, and probably keep track of all those rollovers.

      • Peter
        November 20, 2014 at 4:09 pm

        In regards to your second paragraph. Might the easiest way be to jack up your AfterTax401K contributions the final weeks, or months, of the current tax year and than rollover once?

        For example, say I have budgeted for $10,000 of disposable income for the year. What I would do is divide 10,000 by my weekly paycheck. That would tell you at what point in the calendar year I should change my contributions to 100% Roth-401k contributions. Then, wait till the end of December and rollover into Roth IRA and pay minimal tax on the conversion.

        • 1dirtypanda
          November 21, 2014 at 2:39 pm

          Peter: you could, but you may not want to wait until the end of the year in the event you don’t work at the company at the end of the year (maybe highly unlikely for most?). secondly, let’s say you divide your $10,000 by 5 paychecks and deposit $2k every week into the aftertax 401k – that’s 5 weeks of time where gains could be made of which you’ll have to pay that tax on those gains. yes, 5 weeks is much shorter than say 5 months or 10 months so your gains will be potentially lower. just depends on how you want to handle it. some people i know at my company contribute $X from their Friday paychecks into AfterTax401k and then call Vanguard Monday morning and do the rollover every paycheck until they hit max. While this will reduce your gains, for some they may consider extra work to call every Monday to do the rollover.

      • MtKlimber
        November 20, 2014 at 10:17 pm

        Panda: Please don’t confuse the rules for the Mega-Backdoor Roth (using After-Tax 401(k) Contributions as the conduit) with the rules for the Backdoor Roth (using Nondeductible Contributions to a Traditional IRA as the conduit). In the former case, when the After-Tax Contributions are withdrawn from the After-Tax Subaccount of the 401(k) (and presumably rolled to a Roth IRA), the only amount subject to tax is any Gain on the After-Tax Contributions (with tax-deferral presumably retained by rolling these gains to a Traditional IRA). Any amounts you may have in other Traditional IRAs, pre-tax amounts in other subaccounts of the 401(k), or any other 401(k) accounts, simply don’t enter the calculation. See:

        • Eduardo
          November 21, 2014 at 12:52 am

          Well according to this

          I could just leave growing my After-tax 401(k) contributions until I decide to rollover. Then I would just separate my distribution to two accounts. My After-tax 401(k) contributions would go to my Roth IRA and the gains on the After-tax 401(k) contributions would be rolled over to traditional IRA.

          So there is no need to immediately (January 2nd on the example) roll you contributions from your 401(k) to your Roth and traditional IRA.
          And the beauty of it is that you don’t even have to quit your job. Your After-tax 401(k) contributions can be rolled over whenever you want.

          • MtKlimber
            November 21, 2014 at 2:44 pm

            Eduardo: You are correct. However, the advantage of rolling your after-tax contributions to your Roth sooner rather than later is that the more of the gains on the contributions will be tax free.

            My understanding is that some who use this Mega-Backdoor Roth strategy may have the ability to place a standing order with their 401(k) administrator to roll the after-tax contribution to their Roth immediately after every paycheck. Then there are never any taxable gains associated with the after-tax contribution.

            Despite what MF said regarding the hypothetical January 2 example: “the pre-tax contributions can go directly into a Traditional IRA and the after-tax contributions can go directly into a Roth IRA,” there is no need to frequently roll the pre-tax contributions. They and their associated gains are tax deferred either way and could just as well stay in the 401(k) if the investment choices/fees are reasonable.

        • 1dirtypanda
          November 21, 2014 at 3:08 pm

          right, agree on that After-Tax 401k contributions gets rolled Roth IRA without tax implication, but gains on any amount in the After-Tax 401k sub-account would be taxed – I had this exact situation yesterday since I waited until the end of the year to do this rollover and had been accruing gains in this AfterTax subaccount.

          What I was trying to say which is separate from above statement, is that I think (and could be wrong) it doesn’t make sense to move the PreTax-401k portion to Trad-IRA per the MF article. My understanding is that I want to have a $0 balance in my Trad-IRA every year such that I can then perform the backdoor Trad>Roth IRA trick without tax implications. If I follow the MF article above and in 2014 move both AfterTax>RothIRA and PreTax>TradIRA (ignoring the gains), I will now have money in my TradIRA, let’s say I rolled over $95k for simpler math. NI now have a $95k in my Trad IRA (which came from the rollover PreTax401k) and in 2015 I contribute $5k into my TradIRA intending to do the conversion to Roth. But per the boglehead link I posted previously, I cannot do this TradIRA>RothIRA conversion tax free but rather it’d be subject to tax of 95% on the $5k (5 = 100 * [ $5000 / ($5000 + $95,000)]) or $4750 is subject to taxes.

          Summary is what I would try to do every year:
          1. Backdoor Roth : Contribute to TradIRA and immediately convert to RothIRA
          2. Contribute to PreTax401k.
          3. Contribute to AfterTax401k.
          4. Contribute to HSA.
          5. Perform AfterTax401k rollover to Roth (401k or IRA, up to you).
          6. Leave PreTax401k money there such as to have a $0 balance TradIRA so I can repeat step #1 every year without tax implications in step #1. Secondly – what does it gain you to move PreTax401k to TradIRA anyways?

          • MtKlimber
            November 21, 2014 at 11:32 pm

            Okay, I understand now and agree totally. It seems MF confused the issue when he said, regarding the hypothetical January 2 example, “the pre-tax contributions can go directly into a Traditional IRA and the after-tax contributions can go directly into a Roth IRA.” There is no need to periodically roll the pre-tax contributions. They and their associated gains are tax deferred either way and would usually best stay in the 401(k), particularly if the investment choices/fees are reasonable.

          • FIstudent
            November 22, 2014 at 5:29 am

            I think I’m a bit confused here. Sorry I’m still very new to all this.

            Correct me if I’m wrong ……what I’m getting is that you ONLY have tax implications because you are rolling over gains from after-tax account to tIRA that has NON-DEDUCTIBLE contributions?

            So in other words….. if all my contributions in my tIRA were deductible contributions and I roll over gains from after-tax account to my tIRA then I don’t have to worry about taxes right???

          • ShimmyShuffle
            November 22, 2014 at 8:57 am

            Sick thread you guys. Tons of great things to consider here. This all pertains to exactly what I’ve been researching regarding this topic.

          • Lolarobot
            November 22, 2014 at 2:07 pm

            I have a question about whether or not you can take just the after tax out and not have to take the pre-tax out at the same time. It’s possible that you need to do them both at the same time in order to follow the new guidelines?


          • MtKlimber
            November 23, 2014 at 10:08 am

            Lolarobot: The new guidelines tell us how to do the pro-rata treatment of a single withdrawal from the After-tax subaccount of the 401(k). The withdrawal generally includes After-tax Contributions and any taxable Gains on those After-Tax Contributions. You could take out money from a Pre-tax subaccount at that the same time, but most people would want to avoid that. Thus the only taxable money coming out could be the gain (if any) on the After-tax Contributions while they resided within the 401(k).


            The new guidance, Notice 2014-54, issued on September 18, 2014 addresses how to handle a distribution including pre-tax and after-tax portions, but doesn’t change the existing tax law including the availability of subaccount treatment. As stated in the Fairmark article, you just have to be careful to designate your distribution as coming from the appropriate subaccount.

          • The Mad Fientist
            November 30, 2014 at 5:11 am

            Great discussion, everyone. I understand what 1dirtypanda is saying…if you are happy with your 401(k) investment options and you need to use your Traditional IRA for other backdoor strategies, it makes sense to leave your pre-tax contributions and earnings in your 401(k) instead of transferring them to a Traditional IRA. I decided to transfer the funds to a Traditional IRA in the example because I wanted to show what would happen if you decided to rollover the entire thing after leaving your job (since I imagine most plans don’t allow in-service withdrawals).

      • PorkIsKing
        December 10, 2014 at 11:19 pm

        Can someone help clarify what we should be doing with the after-tax 401k GAINS? In the article it says you roll them into the Roth along with the after-tax 401k contributions. This comment mentions rolling them into a Traditional IRA. Do we have a choice? If so, which one is a better option? Do we pay taxes on the gains? How about just leaving the after-tax 401k gains in the 401k and just moving out the contributions?

        • seattlecyclone
          December 11, 2014 at 10:49 am

          What to do with the gains? You have two options. You can roll them into the Roth, which will cause you to owe some tax on that money this year. Alternatively, the new guidance from the IRS allows you to put the gains in a traditional IRA, in which case you won’t owe tax on that money until you withdraw it from the IRA.

          I don’t believe leaving the gains in the 401(k) is an option. My understanding is that if you do a partial withdrawal from the after-tax subaccount of your 401(k), there’s a pro-rata rule that says an equal proportion of principal and gains is considered to have been withdrawn. Once you make a withdrawal you can split the pre-tax gains and post-tax principal, but you can’t just leave the gains where they are.

          A downside of splitting the gains to a traditional IRA is that it invalidates the “backdoor Roth IRA” strategy, because that only works if you have no pre-tax funds in traditional IRA accounts. If you can afford to make maximum contributions to your after-tax 401(k) and your IRA, you may want to just pay the tax on the gains, especially if the amount is relatively small.

          If the amount of gains is large enough, another possible option would be to roll the gains into a traditional IRA and then roll that IRA into the pre-tax portion of your 401(k).

          I personally convert the whole balance to my Roth IRA a few times a year. By doing the rollovers frequently, there isn’t much time for gains to accumulate, so the amount of gains is relatively small. Also my company’s 401(k) plan allows you to roll over the full balance to a Roth IRA with a few clicks on the website, while any of the other strategies would require a phone call and paperwork. I’d rather pay a few extra dollars of tax than deal with that, but your situation may vary.

          • PorkIsKing
            December 11, 2014 at 12:06 pm

            Thanks for the clarifying response. When I log into my 401k (Vanguard), they have an online tool that allows me to do an-in service rollover for my after-tax 401k. Curiously, the total amount I can do is exactly equal to the total amount of all my after-tax 401k contributions over the years. I have about $4k in after-tax 401k gains that don’t show up in the rollover amount. Even more weird, the target I can choose for the rollover is a Traditional IRA, not Roth.

            1. So it seems like I can just rollover my after-tax 401k contributions by doing it online. My gains would be left behind. Although the tool allows me to do this, it sounds like I probably shouldn’t because it’s in violation of the pro-rata rule you mentioned. Maybe the Vanguard tool isn’t calculating the amount correctly and I should just call in to roll over the entire amount?
            2. The target for the rollover is a Traditional Ira. This obviously wouldn’t make sense to do because I would be paying taxes on the withdrawal later. Why would Vanguard make this the target of the rollover? Is there a reason when this would ever make sense?

          • PorkIsKing
            December 18, 2014 at 9:00 pm

            I called Vanguard. To answer my own questions in case anyone else is thinking about doing this with them, you can’t do it online yourself. They’ll mail you a form in which you have to mail back to do the in-service withdrawal. I’m not sure if this is for all Vanguard 401k’s, or just the way it’s set up with my employer.

          • seattlecyclone
            December 18, 2014 at 9:09 pm

            A mail-in form is *not* required for all Vanguard 401(k) accounts. My wife and I both work for employers that use Vanguard for their 401(k)s. My employer allows you to roll over your after-tax 401(k) sub-account to a Vanguard Roth IRA with a few clicks on the website. For my wife’s 401(k), you need to contact customer support to do the rollover.

  14. November 20, 2014 at 4:22 pm

    Very awesome and concise summary. I’ve seen the “mega back door roth” discussed on reddit and the bogleheads sites, but your graphics convey the practical mechanics better than merely reading about it!

    We weren’t able to take advantage of the mega back door roth, although we did have $72,000 of tax deferred/HSA space that knocked our federal tax liability to almost zero on our $150k combined incomes.

    • The Mad Fientist
      November 30, 2014 at 5:13 am

      Thanks a lot, Justin! It took me a while to figure out how to best represent this strategy visually so I’m really glad to hear you think my efforts were successful :)

      Hope you’ve been doing well!

  15. difu
    November 20, 2014 at 4:57 pm

    Do you know if the TSP will allow after-tax contributions and immediate transfer into a roth IRA? Many thanks.

    • jexy103
      November 21, 2014 at 10:21 pm

      A brief search indicates it’s not a promising/viable option for TSP participants. The current TSP rules only allow for one age-based in-service withdrawal (plus one financial hardship in-service withdrawal): So you could only do it once, plus I haven’t been able to find any indication that we even have the ability to make after-tax contributions. :-( But it’s one more benefit to look at when considering future employment in the private sector.

      • difu
        November 22, 2014 at 11:42 am

        Thanks jexy. I guess the best we can do via TSP is to max out the tax deferred contribution, then rollover to a traditional IRA upon retirement, and slowly convert over to a roth ira depending on our income and tax bracket at that time. Again, this strategy makes sense only if we are anticipating lower income during retirement than during working years.

    • Dev
      December 1, 2014 at 11:44 pm

      I believe you can already make after-tax contributions to your TSP with the new Roth TSP option. Now you can max out your Traditional TSP with pre-tax plus employer matching ($18,000 + $6,000), and then put $29,000 in your Roth TSP, which can be rolled-over to a Roth IRA at anytime.

      But I’m not quite seeing the benefit of rolling over to a Roth IRA from Roth TSP. What do you see as the benefits? Maybe better investment options? Or setting up an IRA conversion ladder for early retirement?

      • dude
        June 11, 2015 at 11:46 am

        One drawback to the TSP Roth is that, come withdrawal time, all distributions from your TSP account will be divided between your Traditional TSP and Roth TSP, in according to the percentage of each; e.g., if your account is 74% Traditional and 25% Roth, a $1,000 distribution will be $750 from Traditional, $250 from Roth.

        There have been hints from the FRTIB that they are looking to change this, but change comes very slowly with the TSP.

  16. DB
    November 20, 2014 at 5:11 pm

    Is a rollover the same as a withdrawal? Or does a withdrawal become a rollover if I make a roth contribution within a certain time window after taking the distribution?Also, what happens if the value decreases? Can you still roll over the full contribution amount?

  17. Trilby
    November 20, 2014 at 9:54 pm

    This sounds exciting. I wish I understood it! Might try again tomorrow.

    • The Mad Fientist
      November 30, 2014 at 5:25 am

      Haha, yeah this strategy is a bit tricky. Read over it again and feel free to ask questions here if things still aren’t clear!

  18. Nick L.
    November 20, 2014 at 10:58 pm

    Another great article and something I am going to look into! Thanks for sharing!

    • The Mad Fientist
      November 30, 2014 at 5:29 am

      Glad you enjoyed it, Nick!

  19. Forrest L
    November 21, 2014 at 12:52 am

    A few months I was going to email you to ask you if you would vet this backdoor – but then I found out that I can’t make after deposits either, and it seemed too good to be true. Other ideas:

    1. Bargaining when you take a job to take an extra $10-20k as 401k instead or salary. This would work in select places.

    2. I’m also wondering if a solo 401k, sep IRAs, and 457s can be used in create ways?

    3. Finally, I’m considering moving into consulting instead of a good salary because of sep IRA/solo 401k max-out (and more time off between contracts).

    • The Mad Fientist
      November 30, 2014 at 5:31 am

      Yeah, the SEP IRA is great. I just opened one up for myself last year so I’m hopefully going to be able to contribute more this year.

  20. Chris
    November 21, 2014 at 10:22 am

    I am also interested to know if the TSP will allow for this. Thanks for the great article.

    • The Mad Fientist
      November 30, 2014 at 5:32 am

      Hey Chris, see the comments above for more info on TSPs.

  21. Allison
    November 21, 2014 at 5:42 pm

    You can only rollover your TSP while employed if over 59 1/2 years old.

    My husband is deploying next year so we will be taking advantage of tax free in and out Roth contributions and then getting as close to the $53,000 max as we can this year due to tax free combat zone rules but in a normal year the TSP will limit us to $18,000.

  22. PorkIsKing
    November 21, 2014 at 11:37 pm

    I’ve been a lurker for a few months, by first post. Thanks for all this great info MF!

    Can we do this in 2014? A commenter above mentioned they just did it. All the examples in the article are about 2015, so I wanted to make sure. I would increase my contributions for the rest of the year to take advantage of some of this.

    I already have about $20k from 401k after-tax and 401k after-tax growth because I over-funded my 401k a few years back and stumbled upon 401k after-tax contributions. I’m assuming when I do this, I would be paying taxes on this. I’m 10+ years from retirement, so it sounds like it’s worth it to take that hit now in order to start shielding the growth?

    Anyone have recommendations on how/where to find a good accountant that can accurately deal with all this madness?

    • The Mad Fientist
      November 30, 2014 at 5:46 am

      Yes, you can do all of this for 2014 but I figured I’d just use 2015 numbers since we’re nearly there.

      It sounds like a good accountant would be able to sort through your issues but I have no idea how you’d find one!

      • Scott
        January 8, 2015 at 11:27 am

        I accidentally did this back in 2012. I was attempting to front load my contributions, and by the middle of the year, my company cut off further contributions because I had hit the before-tax contribution limit. What I didn’t expect was the company match also cutting off, so to get it back I contributed 6% as after-tax. In 2013 when I changed companies and rolled the account over, Vanguard knew exactly how to handle everything. Very smooth. It wasn’t exactly Mega for me, but it works as advertised.

    • Scott
      January 8, 2015 at 4:08 pm

      I used this method on accident in 2012. I was trying to front load my contributions for the year and hit the 401(k) deduction limit by mid year. My employer cut off my before-tax contributions and their match. To get the match back, I contributed 6% in after-tax dollars for the rest of the year. In 2013 when I switched companies, I rolled the 401(k) into an IRA and Roth IRA. Vanguard knew exactly how to do it without triggering any taxes. Very smooth and no accountant needed. It wasn’t a Mega backdoor for me, but it certainly could be and works as advertised.

  23. RJ
    November 22, 2014 at 4:48 pm

    So question…

    If I continue to max out a traditional IRA for the tax benefits now and funnel excess into after tax 401K (pre-tax maxed of course) I can then, since my plan administered by Vanguard permits, complete in service withdrawals and roll directly into the Roth IRA also with them? Will not run into a contribution limit problem because of the tIRA? In what way is this strategy preferable for early FI folks to funding a taxable brokerage?

    • The Mad Fientist
      November 30, 2014 at 5:56 am

      Rollovers don’t affect contribution limits.

      This strategy is preferable for early FI folks the same reason it’s preferable for most folks…it’s a way to shield more of your money from tax (IRA accounts vs. taxable accounts)

      • Carl
        December 3, 2014 at 8:23 pm

        I think RJ is questioning if the Mega Backdoor Roth is in fact superior to a taxable account for FI (specifically those who can utilize the 0% LTCG tax).

        The Mega Backdoor Roth (MBR) shields gains from taxes, but at a cost of liquidity. With an MBR, contributions are tied up for 5 years (it’s treated as a conversion), and gains until 59.5.

        Conversely, if I put that money into a taxable account, I have immediate access to the money, and a 0% tax rate on LTCG (which could be tax-gain harvested each year).

        Certainly tax laws could change. The 0% capital gains tax could go away, whereas current Roth funds would likely be grandfathered if tax changes happened to Roth accounts.

        The MBR is great for higher incomes who can’t take advantage of the 0% LTCG tax, but a taxable account may be better for those who can.

        I would appreciate it if you could poke holes in my argument – as I have the ability to do an MBR this year, but am planning on putting that money into a taxable account instead (I can utilize the 0% LTCG).

        • The Mad Fientist
          December 4, 2014 at 5:53 am

          Ahh, thanks for clearing that up, Carl.

          As you mentioned, this strategy is more useful for those with higher incomes so for some fientists, it may make more sense to go directly into a taxable account.

  24. ICTGorilla
    November 24, 2014 at 2:36 pm

    Do I understand correctly that some of the plans mentioned in previous posts allow for in-service distributions before age 59.5? I called the customer service line this morning for our company’s plan and they told me you could not take in-service distributions until age 59.5.

    • seattlecyclone
      November 24, 2014 at 3:03 pm

      My understanding is that the law does not allow in-service distributions of pre-tax or Roth balances before 59½, but pre-59½ in-service distributions of after-tax (not Roth) balances are legal. Many 401(k) plans allow you to make these distribution, but your plan’s controlling documents may not allow this.

      It may be worthwhile to call again and escalate to a supervisor to make sure that these are not allowed for your plan, since after-tax balances are fairly obscure and many customer service representatives may not be aware of this exception to the “no in-service withdrawals before 59½” rule.

      • MarredCheese
        January 31, 2015 at 12:48 pm

        In-service distributions before age 59.5 must also be legal for pretax and roth 401k plans, because my company allows it. They told me the restriction is that I can only roll over employer matches that are at least 24 months old. So none of my contributions, earnings, or recent employer matches are eligible. It’s not much, but it’s better than nothing. I assume each company has different rules.

    • RJ
      November 24, 2014 at 5:54 pm

      Correct. My plan does in fact permit unlimited transfers of after tax contributions from my 401K to my Roth IRA by a simple phone call to Vanguard up to the maximum combined pre/post tax 401K contribution limit each year. Any gains incurred however though must be taken with the contributions per the rules of the plan. I will call the day after each contribution is posted. I may be able to do it on line via the Vanguard app but have to wait to see if this option becomes available once after tax contributions are credited to the account. A great tip I will maximize going forward. Note however my plan and many limited after tax contributions to a certain percentage of your income, so if you are a serious saver in excess of 75-80%, you may still have to fund a taxable account in addition to this or some other investment vehicle.

  25. November 26, 2014 at 4:36 pm

    I really do learn a lot when a read a MF article. I will check into it ASAP for our company to find out if it is possible for me to utilize. This would be a big help with early retirement if the plan allows it! Keep up the good work, sir.

    • The Mad Fientist
      November 30, 2014 at 6:01 am

      Thanks! Hopefully your plan allows it!

  26. Brian
    December 1, 2014 at 7:58 pm

    Is there any way to get around the issue of our MAGI being to to high to contribute to a Roth IRA? Could I roll all of it into a traditional IRA and then backdoor it into a Roth IRA somehow?

    • The Mad Fientist
      December 4, 2014 at 5:33 am

      Yes, take a look into the normal Backdoor Roth to see how you can get around the Roth income limits.

      If you can make after-tax contributions to your 401(k)/403(b), that would also be a good way to legally contribute to a Roth IRA.

  27. Brian
    December 1, 2014 at 9:07 pm

    If our MAGI exceeds limits for contributions to a Roth IRA is there any way to take advantage of this? Could I roll it all over into a Traditional IRA and then Backdoor it somehow?

    • The Mad Fientist
      December 4, 2014 at 5:34 am

      Contribution income limits don’t apply to rollovers so your income doesn’t matter when it comes to the rollover strategies described in this post.

  28. Jen
    December 2, 2014 at 11:01 am

    Thanks for the post Mad Fientist, another gem indeed! I’m rereading you post and comments every other day and I keep learning more with every reread.

    A suggestion for the blog. I find that a lot of my questions and confusions were cleared up by the comments section, but I did find sorting through the comments a bit difficult. What about organizing the comments reddit style with upvote and downvotes so misinformation can be avoided? Could be a good way to crowd-source additional information generated from your post via the comments section.

    • The Mad Fientist
      December 4, 2014 at 5:40 am

      Hi Jen, thanks for the kind words.

      Good idea with the reddit-style comments. That’s actually something I’ve been looking into lately because I’m getting pretty overwhelmed with the amount of emails I’ve been receiving. I figured if I could answer some of these questions in public (via a reddit-style interface), more people would benefit and also others in the community could start answering some of the questions, which would help me get through the backlog. Sadly, none of the solutions I found seemed very good so I’ll keep searching for an easy way to integrate that functionality into my site.

  29. TravelForLife
    December 10, 2014 at 3:26 pm

    MF – thank you so much for sharing your insights with us. I would NEVER have known any of this without having access to your blog. It seems like there are a lot of strategies to make your money work for you. I am a newbie learning more each day, but it’s all still a little bit over my head. So I have a few questions…

    1. Most of us have limited incomes, how do you decide in what order to do things? For example, I’m maxing out my pre-tax 403b at work and contributing the $5,500 to a Roth IRA. With the rest of my monthly income (about $900 after tax), which strategy is next? Do I do after-tax contributions as your article suggests? Or do I put it in a taxable account? HSA? I’m about 8 years from FI which would put me in my mid-40’s. I’m sure it’s a case by case basis…but what determines your case? :-)

    2. I am receiving a gift of 32,000 (probably given equally over 3 years), same question as above – what is the best thing to do to shield any gains and have it accessible for FI years?

    • The Mad Fientist
      December 13, 2014 at 4:38 am

      If I was in your situation, I’d max out my HSA (see why I think it’s the Ultimate Retirement Account) and then put the rest in a taxable account so that I have some money that’s easily accessible. I actually plan on writing a post on which type of account to contribute to first so look out for that early next year.

      As far as your gift is concerned, I’d check if you could make some after-tax contributions to your 403(b) and try to do that after maxing out your pre-tax 403(b), Roth IRA, HSA, and contributing whatever amount to your taxable account that makes you feel comfortable.

      • TravelForLife
        January 1, 2015 at 10:11 pm

        Thanks so much for the feedback! I will definitely look forward to reading that post.

  30. OverInvestor
    December 14, 2014 at 4:34 pm

    This isn’t exactly new news – the option has been there for a while, and I’ve used it for a few years now.

    For those of us who are self-employed, this is straightforward to implement. You need to set up your own custom IRA plan that allows for both after-tax contributions and in-service withdrawals. All of the financial institutions which will let you open a self-employment IRA have their plan documents set up in a way that does NOT allow that.
    What you would need is something called a Third Party Administrator. I use TPA Inc (aptly named). They aren’t in my state and I’ve never met them in person but it hasn’t mattered. Love working with them. They were a little puzzled by me wanting to invest 52K then within a few months rolling the whole amount over – but once I explained it it made perfect sense to them.

    The advanced topic question is – how do you invest OVER 53K per year? Afterall the 53K limit is per plan, not per person. If you have two employers (or one employer and self employment ) you could contribute 53K to each plan
    What you can’t do is open a second plan for your company. You also can’t create a separate company and set up a separate plan under that. If there’s common ownership (that includes spouses) – there are detailed rules for what that means – then for the purpose of retirement plans it’s considered the same company.
    You also can’t use a PEO (professional employment organization) – they will still use your EIN for setting up the retirement plan.

    So I’m still looking for options. If anyone has any ideas I’d love to hear.

    • Suresh
      December 18, 2014 at 12:00 pm

      I talked to my 401K plan administrator. We have both a pre-Tax and post-Tax 401K available under our plan and the plan administrator says that the total contibution limit for 2013 is 17.5K for both the plans put together and not 52K as you mention. Can you please refer to the IRS document that says the combined limit is 52K and not 17.5K.

      • OverInvestor
        December 18, 2014 at 12:53 pm

        Sure here’s one link
        search for 52,000

        here’s an example they list:
        Greg can make a nonelective contribution of $52,000 to his solo 401(k) plan. This limit is not reduced by the elective deferrals under his employer’s plan because the limit on annual additions applies to each plan separately.

        Your plan administrator doesn’t know what he she is talking about. But it doesn’t matter. If your plan allowed it then they would know about it. That means your plan doesn’t have that option. It won’t help you to rub their nose in it.
        There’s a 17.5 limit for contribution per person across all plans; there’s also a 52K limit for each plan. The difference is made up with this Voluntary AFTER-TAX contribution to PRE_TAX plan. The law allows it but the plan document has to have that provision enabled. If your plan’s establishing document doesn’t have it then it’s not an option to you.

    • Jamie
      March 11, 2015 at 10:19 am

      OverInvestor and MadFientist – what about the ~1M limitation? Is that a hard limit on total funds (401k + Roth + Traditional?) Or is that per account? Is it per person or per family? Does it include gains or just contributions? What happens if it is exceeded?

      • lotus
        November 4, 2015 at 7:41 pm

        Jaime, what is the $1m refers to?

  31. RN
    December 15, 2014 at 1:45 pm

    Thanks for the great post! It’s very helpful.

    A quick clarification, for this Mega Backdoor to work, my plan administrator(Fidelity) has to allow after-tax contribution to Traditional 401K account. All the documents I have read so far say its not allowed.

    • OverInvestor
      December 18, 2014 at 12:42 pm

      You are correct, Fidelity has to allow it, and they do not. You are out of luck. To be fair this is a very rare option in 401k plans.

  32. Sean
    December 17, 2014 at 3:13 pm

    Does anyone know of any Individual (self-employed) 401k plans that allow one to use after tax contributions and unlimited transfers to take advantage of the Mega Backdoor Roth IRA? I called fidelity and they do not offer this option.

    • OverInvestor
      December 18, 2014 at 12:41 pm

      There aren’t plans like that by any of the investment banks. They all have a solo 401k but none of them will have that feature. I’ve called a great many of them.
      What you have to do is set up your own plan. Call a Third Party Administrator company and they will walk you through it. I use a comapny called TPA Inc but there are others.

  33. Newbee
    December 17, 2014 at 10:50 pm

    My company offers a Sarsep account not a 401k. Only Employee contributes employer doesn’t. I maxed it ($17500) in addition to this contributed to Roth IRA ($5500). I have sold my car recently so have $8000 (not planning on buying another car). How do I contribute this towards my retirement?

    • OverInvestor
      December 18, 2014 at 12:39 pm

      If you haven’t already, you can contribute $5.5K to your Traditional IRA, then roll it over into a Roth IRA.
      If you already have made that contribution for yourself and a spouse (if any) then you’re done.

    • The Mad Fientist
      December 19, 2014 at 5:07 am

      Do you have a High-Deductible Health Plan? If so, you could max out an HSA (see this post for more info).

      You could could then use the rest of the money to front load your 2015 Traditional IRA on January 1st.

  34. Daniel H
    December 19, 2014 at 6:43 pm

    Will the Optimized Guinea Pig be able to do this? After expenses, he only saves $45,600/year, well within the $53,000 limit even without the other tax-advantaged accounts.

    • Daniel+H
      December 19, 2014 at 8:25 pm

      Just to clarify: the “only” was not meant to be a judgement on the amount $45,600 as an amount of savings. It is far more than some people save, far less than others save, and will get both Guinea Pigs to FI relatively early. It is instead meant to note that $45,600 is less than $52,000, the total amount that can go into a 401(k) for 2014 (the 2014 equivalent of the $53,000 number in the article).

      I will, however, judge that $45,600 has the nice property of being easy to remember because of the consecutive digits when expressed in decimal.

  35. Daniel+H
    December 21, 2014 at 12:34 am

    Update: I found a December 4 comment on the Guiniea Pig Update 6 post saying this would happen for 2015, but not 2014.

  36. Nick
    January 5, 2015 at 4:35 pm

    Thank you very much for the great article. When I tried to follow up with my plan administrator he just forwarded me to Principal (they administer our plan). The told me “Withdrawals options are regulated by the IRS. This plan currently offers Rollover and 59-1/2 withdrawals.” Am I missing something for the in-service withdrawal to do this? Any IRS guidance I can throw at them?

  37. January 14, 2015 at 10:12 am

    After reading the article and the comments, this seems like a great plan to super charge savings. The problem is many people cant take such a drastic pay cut per check to fund the entire amount of 18K or 52K. Unless you are a very high income earner or have a sizable savings cushion to tide you over for months. I want to take advantage of this, but my plan administrator is fidelity so I might be out of luck, but thanks for the financial knowledge MAD fientist.

  38. MustyMoney
    January 15, 2015 at 9:01 am

    Thanks for the info Mr. Mad Fientist!

    Here’s what I need help on.

    Had a 401K last year, with all three types of money, 401K, Roth 401K, and my non-taxable contributions (paid with post-tax money). When I went to early retirement, they moved my Roth 401K to a Roth Rollover, into my custodial, Folio Investing. Then they moved and lumped both my 401K and non-taxable contributions into one IRA Rollover.

    Now I want to “undo” that, and put all the non-taxable contributions into a Roth account. But it seems Folio Investing is going to do a plain old conversion:

    IRA Rollover -> Roth Rollover

    Is there a way to undo? Or am I stuck, and just go ahead with conversion of IRA to Roth IRA?

    • MustyMoney
      January 21, 2015 at 2:03 am

      I did more research on this with my custodial, Folio Investing.

      My inquiry:
      “If I complete the Conversion Form to move the $XX,XXX from my IRA Rollover to my Roth Rollover for tax year 2014, can Folio Investing move just the portion that is declared non-taxable contribution (i.e., the entire $XX,XXX)?
      Really, I just want to make sure I do not incur additional tax penalty for tax year 2014.
      I don’t know if this is done at Folio Investing during the Conversion process or another IRS form needs to be filled out for tax year 2014 to declare this type of conversion.”

      Folio Investing IRA Dept Response:

      A conversion to a Roth IRA results in taxation of any untaxed amounts in the traditional IRA. The conversion is reported on Form 8606, Nondeductible IRAs.
      We will move whatever amount the client requests and they will determine pre-tax or after-tax amounts when they file their taxes.”


      So the conclusion: that custodial will move as much as you want, and you just have to file the 8606 form to determine your pre-tax and after-tax liability.

  39. January 19, 2015 at 8:36 am

    I work with a TPA and have been in the administration business for 25 years. This after-tax rollover concept was recently presented to me. One of the issues that appears to be missing from the discussion is the requirement to test the after-tax contributions being deposited into the qualified plan. If an employee is considered highly compensated (More than 5% owner or income in excess of $115,000 in 2014), then any after-tax contributions made to the plan have to be included in the ACP test along with any company match. If the test fails then a portion, if not all, of the after-tax contributions may have to be refunded to the participant. I would think those refunded dollars would not be able to be rolled over.

    I would suggest that this may cause complications for a fair amount of people trying to employ the strategy you are discussing and/or recommending. Has this issue been discussed previously and I have missed it?

    • OverInvestor
      January 20, 2015 at 11:22 am

      Seems like if you are the only employee (self-employed) the test doesn’t apply since you won’t have non-highly compensated employees.
      Also after a cursory search I found this:
      “Some companies use a Safe Harbor 401(K) plans to avoid the ADP/ACP test entirely.”

      Not sure what Safe Harbor entails but seems like there’s a way to get around the test.

  40. January 20, 2015 at 11:31 am

    I agree with you if the plan is a solo plan (self employed). No testing required here.

    In general, the safe harbor feature you are referring would not get you around the ACP testing requirement for most cases. Again, I think this could be a big sticking point for “highly compensated” employees of companies that also employ non-highly compensated employees.

    • OverInvestor
      January 21, 2015 at 9:25 am

      Does this ACP test mean that for a company with HCEs and NHCEs, if the HCEs contribute after-tax money the plan might fail the test if the NHCEs do not contribute, despite having the opportunity to do so?

      • Joey Bender
        January 21, 2015 at 12:46 pm

        Regardng the ACP test, yes, that is correct. the HCEs may be restricted in what they can contribute to the plan.

        • Steve F
          February 21, 2015 at 7:20 pm

          I’ll be implementing this strategy in 2015, at least the contributions side. I am going to wait until March of the following year (2016 in this case) to roll over 2015 contributions+gains though to make sure they pass the HCE test. I hear it is quite a mess if you have to back out after you’ve rolled over to the Roth.

          I plan to pay taxes on the gains (a little more perhaps since I have to wait) to keep the tIRA open for the regular backdoor Roth.

  41. PowerMustache
    January 20, 2015 at 7:15 pm

    I just checked and it looks like my company’s 401k plan does allow both after tax contributions and in-service distributions. They do charge a fee of $15 per in-service distribution and there is a maximum of 4 such transactions per year. Thank you, I will be using this strategy in 2015!

    • OverInvestor
      January 21, 2015 at 9:23 am

      You lucky dog. Well enjoy your mega back door.

      Would you mind sharing which employer offers that option?

      • PowerMustache
        January 21, 2015 at 3:12 pm

        I work for a large multinational corporation in the Power/Energy industry. I feel very fortunate that our benefits are above average in many areas.

        It was not easy to figure out that the in-service distributions are allowed, I really had to dig into the fine print of our 401k plan. Also, I’m now finding that we may have a hard 25% limit on the amount we are allowed to withhold from paychecks for the 401k. Since my salary is under 90k, this will limit the amount of after tax dollars I am able to squeeze in once I’m finished with the pre-tax contributions. First i’ll contribute 25% to the regular pre-tax 401k until it’s reached the $18,000 limit, then contribute the 25% maximum to after-tax. My after-tax will be limited to something like $5,000/year due to the 25% limit.

        • Amanda M.
          July 29, 2015 at 5:16 pm

          My employer has a slightly better % limit and a slightly worse roll-over limit. I can do 2 in-service After-Tax rollovers per year (cannot touch traditional or Roth investments). The company limits it to 40% of my paycheck before pay adders (location and COL adjustments). Because of these, I won’t be able to take advantage of the entire $53,000, but it’ll be better than nothing. With the 6 month limit on timing, there may be some growth added to the equation, but I have the option of rolling it with the rest into a RothIRA and being taxed on the growth or rolling it into a separate Trad IRA. I’m pretty excited, and will start doing this as of my next paycheck.

    • Nick
      February 6, 2015 at 10:48 am

      Not if Obama gets his way:

      He is removing the ability to roll over after tax contributions (point #2)

  42. MustyMoney
    January 21, 2015 at 2:12 am

    Anybody here done the Form 8606 to declare how your IRA to Roth conversion gets taxed?

    Seems like, with this form, you can declare how much of your conversion is taxable or non-taxable.

    It makes a moot point of converting your 401K into two IRA baskets, pre-tax and after-tax contributions.

    If you’re stuck, like me, with the 401K rolled into one IRA basket, just do the conversion right way. Set your conversion to your after-tax (non-taxable) contributions, and file that as non-taxable.

  43. Brent
    January 28, 2015 at 9:11 pm

    My question is – are the after tax contributions to the 401K “discoverable” when filling out the FAFSA? My understanding is the 401K balance is not considered an asset nor would Roth contributions but pretax contributions would get added back in as income on the FAFSA. Would the after tax contributions to the 401K be considered income?

    • OverInvestor
      January 30, 2015 at 11:26 am

      Yes, it’s discoverable. Income is income; you have to report all of your income as such on the FAFSA, whether you deposit it into pretax 401k or aftertax or Roth.
      Assets are a different story. Neither Roth nor aftertax nor pretax get reported on the FAFSA, nor on the CSS form, in contrast to the 529 plan which does not get reported on FAFSA but does count as parental assets on the CSS form. Which makes the Roth a much better vehicle for college investing.

  44. MsAligned
    February 3, 2015 at 6:02 am

    “The total 401(k) contribution limit for 2015 is $53,000 ”

    Isn’t it true that for those of us over the age of 50 who are eligible for catch-up contributions the limit for 2015 would be 53K + 6K = 59K?

    • Nick
      February 6, 2015 at 10:47 am

      Yes, the limit is $59k for those turning 50 or older by the end of the year.

  45. Nick
    February 6, 2015 at 10:46 am

    Great strategy. Unfortunately, our supreme leader must read your blog, because his new budget (targeting retirement accounts) is going to close this after-tax loophole.
    See point #2.

    Yay for taxing the rich!

  46. February 13, 2015 at 3:01 pm

    This is a fantastic article, thanks for giving us such awesome info!

    I guess the next step is to read the fine print on the 401k documentation while keeping the fingers crossed. We shall see…

  47. Alpha
    March 2, 2015 at 9:00 pm

    Thanks for the excellent article.

    My employer offers in-service withdrawl but I am not sure where I can open an IRA which will be happy to receive this money. Any pointers?

    Also, along with the regular 401K, I am offered Roth 401K. Is there a reason I should not deposit my money directly into the Roth 401K but do the in-service withdrawl into a Roth IRA?

    • Alpha
      March 2, 2015 at 11:45 pm

      Ignore the Roth 401K question, I understand that the limit remains the same irrespective of the 401K. Would appreciate if you tell me about some institutions who will be happy to take my inservice withdrawl and open an IRA

  48. Eric
    March 8, 2015 at 3:43 pm

    I have about 20K in after tax in my 401k and about 100K in pre tax. I am currently employed at the company with the 401k. Am I able to move just the 20K in after tax, and move no pre tax money? Does it have to go to a Roth IRA or can it go to a Roth 401k?

  49. PorkIsKing
    March 17, 2015 at 4:20 pm

    So I front-loaded my 401(k) this year and did the mega back door Roth. But miscalculated. I will end up exceeding the $53k 401k limit this year if I continue to contribute the minimum per paycheck to get my full company match for the remainder of the year. So I can:
    1) Lower my contributions even more, in which case I would be leaving money on the table because I wouldn’t be getting the full match.
    2) Keep contributing and exceed $53k.

    Assuming I go with #2 and the company doesn’t stop me from contributing over $53k, what happens? Do I have to withdraw the contributions before April 15 to get back to $53k? What about the gains? Are there any penalties? Is it worth it? Any advice would be appreciated.

  50. Tim
    May 29, 2015 at 5:07 pm

    Hello! Bad news for small business owner with employees! According to ascensus and vanguard this would not allow you to pass ACP testing. So recently I’ve been shot down for profit sharing and mega backdoor Roth. Kind of makes me wish I was an independant contractor again. Any ideas or websites for small business owners? After reading the HSA article we jumped on that last year but always looking for more ideas beyond that and the 401k.

  51. Steve
    June 22, 2015 at 4:44 pm

    Just want to add that you’ll really need to read the fine print on your 401k plan rules which are usually in the Summary Plan Description (SPD). I was so excited to learn my company’s plan, administered through Fidelity, allowed for after-tax contributions and in-service withdrawals. I was about ready to take the plunge until I read the SPD which stated there would be a 6 month suspension on ALL contributions (pre-tax, Roth, after-tax, etc.) after making an in-service withdrawal. That essentially would have stopped me from receiving my normal employer match on contributions for 6 months!

  52. Marie
    June 26, 2015 at 2:57 pm

    For those of us with self employed income who also have regular w2 income … I contribute 18k to my 401k. What else can I do? I know there are SIMPLE IRAs, individual 401ks, and SEP plans (for those of us in the US). Anyone have guidance on what is the best way to go? I should be able to contribute 53k-18k = 35k (since my 401k has no match).

    Anyone know anything about SIMPLE IRAs, and SEP plans or any other self employed retirement plan? Wondering if one is better than another for any reason. Can any offer a match?

    Thanks for the help!

  53. Steve F
    June 28, 2015 at 2:27 pm

    Steve — I decided to double check my plan docs based on your comment. My plan at least distinguishes between a “hardship” withdrawal (no contributions for 6 months) and an “in service” withdrawals (no such penalty). The devil is in the details (and you may want to confirm with your plan provider as well).

    I’ve just started maxing out the after-tax this year. I plan to roll it over next March/April once I know the highly compensated employee bit has cleared. It’s a bit of a hassle but it should be worth it.

  54. Alex
    July 7, 2015 at 5:29 pm

    As a solo/individual 401(k) holder with Roth and traditional sub-accounts, my understanding was that only $18,000 could be contributed to the Roth sub-account in my 401(k), and the remaining $35,000 would need to go to the traditional pre-tax sub-account. Is it the other way around? (I’m self-employed so employee and employer/profit-sharing come down the same funnel.)

    Thanks for the great article!

    • Ilya
      July 8, 2015 at 9:21 am

      no you had it right. 18K to after-tax Roth. 35K on after-tax basis to pre-tax portion. Alternatively you can put the entire 53K on after-tax basis to the pre-tax portion. Doesn’t matter either way – after you contribute the money you roll it into a Roth IRA. You just need to have a plan that allows you to make additional after-tax contributions to pre-tax account and have in-service withdrawals, which means in your case you would most likely need to create a custom plan and terminate your solo 401k.

  55. TL
    July 24, 2015 at 1:32 am

    After you do mega backdoor Roth conversion and get Aftertax-401K funds successfully transferred into Roth IRA, do you have to complete any particular tax form at end year (similiar to Form 8606 for the normal backdoor Roth)?

    Additionally, is there anything you should do to ensure ROTH IRA custodian firms (such as TDAmeritrade, Etrade or Charles Schwab) would not classify the incoming aftertax-401K funds as current year’s contribution? That situation would be a mess.

    Thank you!

  56. Brad
    August 26, 2015 at 9:33 pm

    A couple questions (and I apologize for not reading all the comments to see if they have already been asked/answered):

    1. Is there a limit to how much you can rollover to a Roth IRA in a given period?
    2. What are the key distinctions between a rollover and a conversion? Any limits on how much you can convert?
    3. Why do you suggest moving the pre-tax contributions from the 401(k) to a traditional IRA? Wouldn’t the pre-tax contributions and growth be treated the same way in either account?
    4. You don’t explicitly state this but in the diagram right above the conclusion section, where you depict the rollover strategy, it seems misleading that the growth is part of the picture since you stated that rather than leaving everything in the 401(k) to grow we immediately rolled over the balance on Jan 2. So is your image assuming 30% growth after rollover? Just want to be clear.

    Awesome article with great information. Thank you!

  57. bruce chou
    October 29, 2015 at 1:52 am

    I want to make an aftertax contribution for the company 401k for tax year 2015. In 2015, suppose I earned, w2, $52,000 as a contract employee (W2), and only $4000 as a “regular” employee (W2). Since these are after-tax contributions, I believe the deadline for making the contribution is 4/15/2016. I have some questions:

    1) Since I am not asking for any employer contributions, and I also don’t intend to make any pre-tax contributions (for simplicity’s sake, in this example), would I be writing a check? After all, a one time contribution of $53000 would be much more than any particular paycheck, so they could not just do a payroll deduction.

    2) My employer does not offer a 401k until I change from “contract employee” to “regular employee”. But in determining my minimum total contribution limit, would’t it be based on both types of wages for that year, since both contracts were with the same employer, same W2 EIN? Hence, I can contribute more than $4000, right?

    3) If my new contract to become a “regular employee” is signed, what do you think would typically need to be the latest date, in order for me to be able to make 2015 contributions? Obviously, December 31, 2015 would be a good guess, but I want to be sure. After all, there’s probably a lot of paperwork and red tape. And I want to know if I should ask them to rush this, because being late by just a few days would therefore make an entire year’s worth of 401k contributions missed.

    Thanks so much for your advice!

  58. lotus
    November 4, 2015 at 7:51 pm

    If one could do Mega door Roth IRA, in what instance that person would do regular backdoor Roth IRA other than if there is some more funding left? Wouldn’t it be simpler to just do the Mega door?

    • Bruce
      November 5, 2015 at 11:30 am

      They can do both

  59. Tim
    December 29, 2015 at 1:32 pm

    Great post! This got me stoked. I checked with both my 401k and my wife’s 401k plans and they don’t allow post-tax contributions or in-service withdrawals…disappointing.

    Nonetheless, thanks for the education MF!

  60. Jane
    January 9, 2016 at 3:25 pm

    So here’s a question. Husband retires next week. We have a 457dc that we will be moving to Vanguard Traditional IRA then doing the roth conversion ladder thing. (about $200,000 total). If we leave it with the employer-we can take payouts before retirement age but the fees are high. Is moving it the good option?

    And we could contribute an additional $35,000 from his vacation paydown to the pretax account but that ties it up for another 10 years (we are both 50). We were thinking about just putting it in a taxable account for backup money. His pension payouts will be about $10,000 pretax a month. That will cover our expenses. (we live in California).

    Now I’m thinking we should put it in the pretx account, roll to an ira and roll to the roth so it can grow tax free. Then it’s only tied up for 5 instead of 10 years. Thanks for your patience. Still trying to figure it out.

  61. Lucas
    January 12, 2016 at 11:02 am

    Guess i am one of the lucky ones whos plan allows the after tax contributions and in-service distributions on after tax contributions (apparently i can’t do any other in service distributions though). I started doing after tax contributions last year and was just able to do an in-service roll over to my ROTH. I am upping these after tax contributions this year :-) I can only contribute a total of 30% of income to my 401k in my plan but it should get me a good chunk of extra ROTH funds at the end of the year (or at any earlier point if i want to do the conversion).

  62. ACN
    February 8, 2016 at 1:14 pm

    my 401k plan allows us to contribute 10,0440 maximum after tax. Doesn’t it make sense to immediately transfer this money into my roth 401k? is there a reason to not do this?

  63. MustyMoney
    February 10, 2016 at 4:54 pm

    My Personal Example : 401K -> IRA -> Roth | Doing the taxes for it now

    Getting around to doing my 2015 taxes now, so here’s my example. Hope this can clear things up for some people.

    2014: Laid off from company, took the distribution to rollover 401K to IRA on the exit.
    $400K total, $100K of that was non-taxable (non-tax because those contributions were after-tax money).

    2015: I converted $130K to Roth, thinking that because $100K was non-taxable, I’d be okay with not too much of a tax hit. (I WAS WRONG). I also thought, because I live overseas, I can get the foreign income deduction (I WAS WRONG, AGAIN).

    2016: Turbotax said the conversion gave me about $100K of taxable income. Because the ratio of taxable to non-taxable (in the IRA) was 4:1, 75% of the $130K converted amount was taxable. I lived overseas (330 days outside of US soil), but cannot take the $100,800 deduction, because that applied only to foreign EARNED income (a Roth Conversion is not foreign earned)

    I did not want to get stuck paying tax on $100K of “income”.

    So will have to recharacterize the Roth (before tax due date), to partially undo the conversion. So only $34K will be considered converted from IRA to Roth for 2015.

    For my filing (married jointly) I will pay 0 federal tax on $34K of “income”. If I keep converting ~ $30K every year, then in 15-20 years, the IRA will all be converted to Roth, tax free! Since I retired early, this timeline works perfectly for me.

  64. Titus
    March 31, 2016 at 11:32 pm

    This is a bit late, but one thing I don’t understand is the proper order in how I invest. Me and my wife make about 100k/year and I don’t think my or her 401k is anything special. I’ve been hazy if I could do both IRA and 401k. So should I do it this way?

    1st: 401k up to the match for both of us
    2nd: HSA (which I don’t have – or at least my employer doesn’t think I have access to it)
    3rd: IRA up to the max for both of us
    4th: Finish up 401k up to the limit for pretax contributions
    5th: Mega Backdoor Roth
    6th: And assuming anything is left – then what? After tax brokerage account?

    I’ve searched the net and still haven’t gotten a straight answer about this, for some reason it seems people have been leaning on maxing out a 401k even if it’s bad and don’t say anything about an IRA unless you don’t have a 401k.

  65. Brennan
    August 4, 2016 at 6:23 pm

    Another thing to check is if your plan allows for roll-overs within your 401k (I have a 403b, but same basic principle). I get paid bi-weekly and contribute the max of $18,000 to my Traditional 401k and some extra into the after-tax 401k. Then, as soon as I get paid I do a roll-over and move the after-tax 401k into my Roth 401k. My plan allows for in-service withdraws, but only two a year. This way, I can get all of the after-tax contributions into a tax-advantaged account right away and not have to wait!

  66. Wally
    August 5, 2016 at 1:22 am

    Is it ok to just make a yearly one time contribution to your after tax 401k and then withdraw and move the entire amount to a Roth IRA the next day and pay taxes on the gains if any?
    For example:
    I have $20,000 in savings that I would move to the after tax portion of my 401k let’s say Jan 1st and then move the $20,000 plus any gains Jan 2nd to a Roth IRA. Would this be ok rather than contributing money to after tax every paycheck and moving money out multiple times a year?

    • August 5, 2016 at 11:05 am

      You can’t contribute to a 401(k) from outside savings. The money has to come out of your paycheck. If you have a big bonus check or something around the beginning of the year you might be able to put that in your 401(k) to reduce the number of contributions over the year.

  67. heather
    August 22, 2016 at 7:04 pm

    Can after-tax contributions made to a 401(k) plan be in excess of a person’s income for that particular year? Let’s take a Sub-S owner who is 40 years old and has W-2 income of $40,000. Can this person contribute the maximum $18,000 in deferrals (regular or roth) plus contribute an additional after-tax amount of $35,000? The total contribution made would be in excess of his W-2 income for the year. Is this OK?

  68. Mat
    October 10, 2016 at 5:08 pm

    Could anyone guide me what I need to do to contribute 35k to after-tax Roth 401k in addition to 18k to Traditional pre-tax 401k?

    I’m currently at 8k in traditional pre-tax 401k and at 6k in Roth 401k at Vanguard contributed from my payroll.

    When talking to vanguard to contribute more $$ towards Roth 401k, they said that 18k is combined limit for both type of contributions.

    I verified with vanguard that 18k is IRS restriction and not from my employer.

    Please shoot me any questions to make this happen.

    Any help in this regards is greatly appreciated.


    • October 11, 2016 at 12:47 pm

      Your plan needs to offer you the option to make after-tax *traditional* contributions. The combined limit for pre-tax traditional and after-tax Roth contributions is $18k. Only the after-tax traditional contributions can go above that limit, and not all plans allow you to make these.

  69. Josh
    November 6, 2016 at 3:02 pm

    Fabulous article — one area where I’m confused:

    Isn’t this “Mega Backdoor Roth” (MBR) strategy incompatible with the “Regular Backdoor Roth” (RBR) strategy? The reason I’m concerned is that in the MBR strategy, we create a Traditional IRA to hold the pre-tax portion of our in-service 401k distributions. But in the RBR strategy, we need a portfolio that avoids pre-tax dollars in Traditional IRA accounts, to avoid the pro-rata rule when rolling into a Roth IRA.

    So I’m confused about how MBR could be used with RBR. Are they mutually exclusive? Am I missing something?


  70. Equity101
    January 13, 2017 at 5:23 pm

    How do you know if/when you’re able to transfer the balance from 401k after tax to the Roth? You mentioned your company doesn’t slow you to?assuming my company is the same way, I can do it only after I leave my current employer?

  71. Ning
    January 24, 2017 at 5:29 pm

    OMG if I only read this post like 1 months ago when I rolled my older employer’s 401(k) into my new employers!! I apparently had about 5k after-tax contributions in there. Now that all the money is in my new employer’s 401(k), I don’t think I can do another withdrawal/rollover until I leave or retire! Ugh!!

    Great article btw! I’ll keep this in mind if I change jobs again.

  72. Jenna
    March 9, 2017 at 6:22 pm

    Is there any problem with doing a Backdoor Roth and a Mega Backdoor Roth in the same year? There’s a limit on the number of conversions you do per year, right? Not sure about that.

  73. Fe
    March 20, 2017 at 11:50 am

    Wish i read this 2 years ago when it was posted. One question I have is :

    I hear that creditors can’t go after a 401k but can go after an IRA.
    If I move my after-tax to an IRA, am I exposing myself to creditors?
    Do IRAs benefit from the same protections as 401k accounts?


  74. SS
    March 23, 2017 at 4:45 pm

    Curious, does this opportunity only apply to people with 401(k) retirement accounts?
    Can the same process be applied to individuals with 403b or 457 retirement accounts?
    Meaning (assuming that the company would allow for after tax contributions beyond the $18k limit and for in-service withdrawals), would someone be able to utilize the Mega Back Door Roth?

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