Fidelity Just Industrialized the Mega Backdoor Roth

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by RVWood

I wanted to share as I think this is big for making this incredible wealth building strategy more simplified.

Using the mega backdoor Roth method was cumbersome previously. You had to really know what you are doing and then make periodic phone calls to to a conversion. But I learned Fidelity has now worked it out so that after-tax contributions will be automatically scraped every month and put into a Roth IRA. This vastly simplifies this incredible wealth-building strategy. It essentially eliminates Roth income limits and opens up the ability to save more like $30k per year vs. the $3k per year in a normal Roth. I imagine other 401k providers will follow soon (or have already). If they can manage to auto-invest the monthly contributions into pre-selected funds, that would fully close the circle.

So what is the strategy? If your plan allows, you can make after-tax contributions to your 401k and roll them into a Roth IRA. After-tax contributions do not normally make sense to do by themselves, but it makes great sense if you then routinely roll your after-tax contributions into a Roth IRA through an “in-service distribution”. The in-service distribution should only be for after-tax contributions only to avoid unintended tax consequences. And this should be done routinely to avoid any major gains built up on the after-tax contributions which would also have tax consequences. Once in the Roth, you are golden, free from taxes for life.

There is no income limit to this strategy vs. a regular Roth and you can contribute much more. To determine what you can contribute, you need to take the $56k annual 401k contribution limit and subtract any before-tax contributions and any matches. For instance, if you do the max $19k before-tax contributions and then get $6k in matches, you can then make as much as $31k in after-tax contributions per year and convert that to a Roth.

Check with your 401k company if this is a doable strategy for you under your plan before embarking on it.


I think the standard advice may need to be altered then. It has often been max your 401k match, then max a Roth IRA and then do more before-tax 401k. I think it should shift to max your 401k match and then pump as much as you can into the Roth IRA via the mega backdoor approach, then max a regular Roth, then back to 401k (if you happen to be swimming in gobs of cash!).

For the disciplined investor, the mega backdoor Roth can also help you tuck away one-time upsides like an inheritance. Say you inherit $60k and want to invest it long term. Over the course of two years, you can max out your after-tax/Roth contributions to your 401k (say $30k per year extra). You can make up for the shortfall in income this causes by replenishing the contributions with the $60k inherited. Over the course of two years, the $60k is drawn down to zero and you now have $60k in a Roth that will grow tax free forever. And the plus with a Roth is, if you really need some cash later, any principle you have contributed can be withdrawn later without tax consequences. (Provided the account is open at least 5 years, I recall. And you really shouldn’t do this unless absolutely necessary).


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