Mega Backdoor Roth Explained: What Is It and How It Works

Unlock one of the most powerful tax and wealth-building strategies available today: the Mega Backdoor Roth. In this episode, Mat Sorensen breaks down how you can contribute up to $70,000 each year into Roth accounts, creating massive tax-free growth for retirement. Originally filmed for the Mat Sorensen YouTube channel, this special episode is now available on the Directed IRA Podcast.

Mat explains step by step:

• Why the Mega Backdoor Roth is so effective for high-income earners
• How to use a 401(k) or Solo 401(k) to maximize Roth contributions
• The role of after-tax contributions and how to convert them
• Key rules, qualifications, and pitfalls to avoid
• Why rolling funds to a Roth IRA can provide greater investment flexibility and lower fees

Whether you’re a high earner with a workplace 401(k) or a self-employed professional with a Solo 401(k), this strategy can help you supercharge your retirement savings and build wealth tax free.

Chapters: 

00:00 - Introduction to Mega Backdoor Roth

01:15 - Breaking Down the $70K Strategy

02:12 - After-Tax Contributions Explained

05:17 - Converting to Roth: Two Options

08:19 - Potential Snags and Limitations

10:17 - Disclaimer and Closing

Directed IRA Homepage: https://directedira.com/

Directed IRA Explore (Linktree): https://linktr.ee/SelfDirectedIRA

Book a Call: https://directedira.com/appointment/

Other:
Mat Sorensen: https://matsorensen.com & https://linktr.ee/MatSorensen
KKOS: https://kkoslawyers.com
Main Street Business https://mainstreetbusiness.com

Episode Transcript

Speaker 1 (00:00):
Welcome everyone to the Directed IRA Podcast.
This is Matt Sorensen, with aspecial episode for you today,
talking about the mega backdoorRoth.
I recorded this and want toshare it with all of you here on
the podcast.
Please enjoy.
The mega backdoor Roth is myfavorite tax and wealth building
strategy.

(00:20):
All bundled up into one.
It is a way you can get $70,000of Roth money where you pay no
taxes.
You're making money and notaxes.
You pull the money out inretirement.
You can do that every yearutilizing the mega backdoor Roth
strategy.
Now, in today's video, I'm goingto break down why you want this
, how it works, what are thequalifications and the actual

(00:41):
steps you're going to need toget $70,000 of Roth money set
aside every year.
Now you could only put $7,000into a Roth IRA.
So how are we getting to$70,000 every year, matt?
How are we doing 10 times that?
Well, we're using a 401k.
This could be the 401k at work,where you may work.
This could be your solo 401kfor any of you self-employed.

(01:02):
Okay, I'm going to break downhow you utilize and execute the
strategy.
To get 70k in every year Allright, so now this assumes that
you have a 401k.
All right, now, if you have ajob, you probably have a 401k.
Maybe you're self-employed.
This works for you.
Now I want to say this at theoutset For those of you that are
self-employed, where you dohave employees in the business

(01:23):
and you have a company 401k plan, this doesn't work for you.
Okay, I'm just going to rulethat out.
It doesn't work for you.
It doesn't work for me.
I have employees and we have401ks.
I can't do this strategy.
But if you're an employee at acompany, a high income earner,
this is a strategy you should bethinking about.
If you're a self-employedperson with no employees using a
solo 401k, this is somethingyou should be thinking about

(01:44):
because you can utilize andexecute the strategy.
70k every year All right, let'sbreak down how this works.
Now.
The reason we use 70k, and whythat is the number, is that is
the maximum amount of money youcan put into a 401k.
Now, if you're 50 plus, you getanother 7,500, so 77,500.
And even those 60 plus, there'sa little additional few

(02:04):
thousand dollars you can put inevery year.
But I'm just going to say 70Kin general, because that's the
number.
No matter what age you are, youcan at least put away utilizing
the mega backdoor Roth strategy.
All right.
Now let's talk about how youactually get the money in.
Well, the first thing we'regoing to do is you're going to
use the $23,500 you can do as anemployee contribution into a
401k.

(02:25):
$23,500 you can do as anemployee contribution into a
401k.
Every 401k out there allows forthis and 99% of the 401ks allow
for Roth 401k dollars.
Okay, remember, this is themega backdoor Roth strategy here
.
So we want to do Rothcontributions, all right.
So the first thing we're goingto do 23,500 Roth contributions.
Now, most 401ks have a companymatch where the company matches

(02:46):
how much money you've put in andthey do a certain amount of
match based on your salary.
Let's say, for this example,you make $300,000 a year.
Okay, I'm using that examplebecause usually it's high income
earners that are making goodmoney that are executing on this
strategy who want to do morethan 23,500.
Okay, so if you've made $300Kand, let's say, your company

(03:06):
does a 4% match that's verycommon that means they're going
to put in $12,000 into the 401kfor you.
All right, now, remember, themax amount I can do in the 401k
is 70K.
I did $23,500 of Roth dollars.
Now the company put in $12,000.
Now, when the company putsmoney in this is a new law that

(03:27):
passed a couple of years ago thematch can be Roth dollars.
A lot of companies still dotraditional dollars as the match
.
That's just how they've alwaysdone it, and that's fine.
You can convert it to Roth.
At the end of the day, we'vegot another $12,000 of Roth
dollars here.
Either way, though, we knowwe've got another $12,000 in.
So, between my $23,500, thematch from my employer of

(03:48):
$12,000, we've got $35,500 in.
But how do I get to $70,000,matt, a lot of people get stuck
here and they think well, I'vemaxed out my 401k.
What do I do next?
Well, the first thing I'd sayis go to a backdoor Roth IRA.
By the way, you can do $7,000 ayear in a backdoor Roth IRA

(04:09):
independent of this strategy,and that's pretty easy.
Whether you do the megabackdoor Roth or not, you can
still do the backdoor Roth IRA.
Okay, but I still got $34,500left of contributions to get to
that 70,000 max.
What do I do?
How am I getting that 70K?
Well, the answer is you'regoing to make what's called an
after-tax contribution to the401k.

(04:32):
Now, this is a little uniquecontribution.
It's not as common the 401kadministrator sometimes gets
confused.
The frontline customer serviceperson may not know what this is
.
The HR person that works onyour 401k plan has maybe talked
to two people over their 10 yearcareer that have actually done
this All right.
So this is not standardizedprocess is what I'm trying to

(04:53):
get at.
This is a loophole.
It's legitimate, it's usedoften, but I'm just saying it's
not like right on the menustaring you in the face.
So you will ask does the planallow for after-tax
contributions?
About 40 to 50% of 401k plansin the US allow for after-tax
contributions.
If your plan allows forafter-tax contributions, what

(05:16):
that means is we can fill therest of the money up to the 70K
with what is called an after-taxcontribution of this $34,500.
So I throw in $34,500.
This could be a one-time thingyou put into the 401k.
You could be doing it over time.
Frankly, most of our clientsover the years that have
utilized this strategy just do aone-time contribution in from

(05:39):
their personal bank account.
It's typically not coming offof payroll, but they'll wire it
in or they'll ACH it in to their401k administrator.
All right, now I've got that$34,500 in.
I've got a total contributed into the 401k of $70,000.
Now you must follow the nextstep.
You are not done If you stophere.

(06:01):
You have jacked this up.
You must follow this next stepand this is critical.
You have two options.
Option one is to do an in-planRoth conversion.
What that means is you'retaking this after-tax
contribution bucket andconverting it to Roth.
You actually have to do thatand there's a form you'll fill
out to do it.

(06:21):
Now, generally, when youconvert dollars to Roth, you're
typically converting traditionalpre-tax dollars over to Roth.
You took a tax deduction on it,so you have to pay tax when you
convert.
But when you convert after taxdollars, you never took a
deduction.
It becomes Roth dollars andthere's no tax.
So voila, I just fill out aform and this $34,500 is now

(06:47):
Roth 401k dollars in my Roth401k plan, just like the $35,500
of other dollars I put into the401k.
Now, option two is better,though I actually prefer you to
do option two, and this isrolling out the after-tax
contributions to a Roth IRA.

(07:08):
Now, generally, 401k dollarsfor a company where you still
work and are employed are lockeddown until you retire, but
there is an exception forafter-tax dollars.
You can roll out after-taxcontributions whenever you want,
even while you're stillemployed there, even when you're
only 40 years of age you're notretirement plan age so I can

(07:28):
roll those dollars out as justafter-tax dollars and receive
them directly into a Roth IRA.
Now, at Directed IRA, wereceive these all the time.
A lot of high-income earnersare utilizing this mega backdoor
Roth strategy and they open upa Roth IRA with this to receive
this $34,500 of after-taxcontributions.

(07:50):
We receive it into the Roth IRAand now it's just Roth IRA
dollars, no Roth conversionrequired.
We can receive after-taxcontributions directly into a
Roth IRA and they areimmediately Roth IRA dollars,
growing as you're investing itwith no tax and coming out
tax-free at retirement.
Now the reason I like the RothIRA here and rolling it out of

(08:13):
the 401k plan is twofold.
First, you have more investmentoptions in a Roth IRA.
So, like if you're a directedIRA, you can buy real estate
with your Roth IRA, invest in aprivate fund, invest in crypto,
in a startup.
These are all investments IRAscan own, and particularly Roth
IRAs, the most popular accountthat we have here.
So you have more investmentoptions.

(08:35):
Sure, you could buy a stock ora mutual fund here as well, but
most of our clients are cominghere to buy a private,
non-publicly traded asset.
It's what we do at Directed IRAevery day.
So that's one reason, justgreater investment options.
The other reason is there'sless fees in IRAs.
Your 401k plan the average 401kplan has one to one and a half

(08:55):
percent fees.
If you got a $100,000 account,you're paying $1,500 in fees,
all right, so there's typicallymore fees also on a 401k plan.
So you can analyze thatdepending on your situation.
But look at the investmentoptions you may want to invest
into as you're consideringwhether to roll out or keep it
in plan, and also look at thefees that you'll pay for the IRA

(09:15):
versus what All right.
Now remember there can be twosnags to the mega backdoor Roth.
First, any of you businessowners where you want to do this
strategy but you also haveemployees in your company 401k
this doesn't work for you, sadly.
If you're self-employed with noemployees using a solo 401k we
love those set those up forclients every day.

(09:37):
You can do the mega backdoorRoth.
You can do that every year.
Also, if you have a 401k at anemployer where you work Roth,
you can do that every year.
Also, if you have a 401k, addan employer where you work, this
is easier.
Now.
The second snag and the lastyou need to worry about is the
plan must allow for after-taxcontributions.
When you think about this wholestrategy here, what's the
loophole in it?
Well, the loophole is thisafter-tax contribution.

(09:58):
That's what allows you to getup to this maximum of $70,000,
where in the example here, weput $34,500 more away in Roth
dollars because we were able todo an after-tax contribution.
A lot of plans do allow forthat, but make sure you check
that before you start executingon this strategy.

Speaker 2 (10:17):
And thank you everyone for listening.
A quick disclaimer and reminderthis presentation does not
constitute an attorney or CPAclient relationship and it is
always in your best interest toconsult competent legal and tax
professionals when conductingyour own personal transactions.

Speaker 1 (10:33):
We also want to make sure you know this is not
investment advice or financialadvice.
We're just trying to give youeducation, ideas and strategies
you can take to yourprofessionals or conduct your
own research on.
We'll see you next time.