Five (and a Half) Ways to Get Money Into a Roth IRA (Part 2)

This is Part 2 of a two-part series on how to get money into a Roth IRA. (Part 1 is found here.)

Method 4: Mega Backdoor Roth
Whoever came up with this name should have thought of a different name, because this technique has nothing to do with the aforementioned Backdoor Roth IRA.  In fact, it is only similar in the sense that it CAN get additional money into the Roth IRA. A closer look at the name “Mega Backdoor Roth” implies correctly that the money can actually go into not just a Roth IRA, but also a Roth 401k or 403b. Granted, the word “mega” does make sense, because instead of the usual $6,500 – $7,000 limits for IRA contributions, this method makes it possible to get a much greater amount into a Roth IRA. As of 2023, given the total 415(c) limit of $66,000 and the employee limit of $22,500 (+ $7,500 if over 50), the potential amount is $36,000 assuming the employer match is $0. Assuming a very generous $10,000 employer match, the potential Mega Backdoor Roth (MBR) amount would still be $26,000.  In addition, if you have multiple employers, the potential amount can even be greater.  Unlike with IRAs, whether you have access to MBR actually hinges on your workplace retirement plan features, namely the ability to make after-tax 401k contributions coupled with the ability to make either In-Plan Roth Rollovers to the Roth 401k subaccount, or an In-Service Distribution to a Roth IRA.  These terms are rather precise, so you will want to double-check your workplace plan’s summary plan description. While the main idea of this post is to detail the various ways that money can be put into a Roth IRA, depending on your career exit plans, it could be better to go for the MBR in-plan Roth rollover into a Roth 401k instead of Roth IRA.  Ideally you will want to consult with us to figure out your optimal strategy, but you can’t really go wrong with either option.

Method 5: Roth 401k Rollover to Roth IRA
While the Roth 401k and Roth IRA are somewhat equivalent in terms of overall tax treatment, the Roth IRA offers the ability to track basis and earnings separately, and more importantly to make withdrawals of the basis separate from the earnings portion. Even if you are over 59.5 and have met the five-year periods for either the Roth 401k or the Roth IRA, it can still make sense to consolidate your Roth funds into the Roth IRA just from a simplicity of management perspective.  (From 2024 onward, Roth 401ks no longer require RMDs, so from a liability protection perspective, you may want to consider keeping your ERISA-covered workplace plans, but that’s a different discussion.)  If you are under 59.5 and there is any possibility that you may want to access Roth funds due to early retirement, for example, then you will want to consider moving the Roth 401k to the Roth IRA.  While both the Backdoor Roth IRA and the Mega Backdoor into the Roth IRA will result in a 5 year conversion basis to be fulfilled before accessing the funds completely tax free, doing a Roth 401k rollover to the Roth IRA will result in immediate treatment of the rolled over contribution (investment) amount as contributed basis, and therefore immediately eligible for tax-free distributions.  But we have seen a lot of confusion between this method and the MBR method above, so we encourage you to consult with us or another reliable financial advisor to make sure you are planning this correctly.

Method 5.5: 529 Rollover to Roth IRA
Among the many recent changes introduced in the CARES 2.0 Act aimed at improving college savings methods, one interesting change starting in 2024 is the ability for 529 plans to be rolled over into a Roth IRA in the beneficiary’s name.  In my view, this rather effectively helps reduce the uncertainty that many parents face in funding 529s, especially when they do not know if their child(ren) will even go to college.  According to the rules of this 529 rollover to Roth IRA, there is to be a lifetime maximum of $35,000 that can be rolled over into the beneficiary’s Roth IRA; the beneficiary must have been named in the 529 for 15 years or longer; any funds to be rolled over cannot have been funded within the last 5 years; and, each rollover into Roth IRA counts against the annual $6,500 (2023) or $7,000 (2040) Roth IRA contribution limits of the beneficiary.  So, there are some specific rules you will need to be aware of, but the good news is that if you have younger children and have maxed out your other tax-advantaged accounts, this option becomes very attractive from a longer-term planning perspective.  The reason I called this method a “0.5” method is because of the many limitations, but it is a new method that allows the Roth IRA to be funded from a new source.

Final Thoughts:
There you have it: 5.5 ways to getting money into a Roth IRA. 

Among the various financial techniques and account-types available, the Roth IRA is definitely a great tool that everyone should at least know about, and most people should seriously take advantage of.  Some of the techniques, such as the MBR, were at risk of being discontinued in the course of legislative processes in 2022.  And future changes could pave the way for greater access to Roth IRAs, or even cut off certain methods currently available.  Whatever the future holds, the Roth IRA features are too attractive not to make some use of, especially for smoothing out your tax burden in your post-retirement years and allowing your investments to grow tax-free.