The Tax-Free Alchemist: Backdoor & Mega-Backdoor Roths
The Tax-Free Alchemist: Backdoor & Mega-Backdoor Roths
Income limits are for amateurs. How to legally bypass IRS restrictions to stuff $69,000+ per year into a tax-free Roth account and defuse the RMD time bomb.
Executive Summary
- The RMD Trap: Traditional IRAs/401ks are tax-deferred, not tax-free. At age 73, the IRS forces you to withdraw money (RMDs), often pushing you into the highest tax bracket right when you want to retire. You effectively have a “Mortgage” owed to the IRS on your retirement account.
- Backdoor Roth: High earners (MAGI >$161k) are banned from direct Roth contributions.
👉 The Fix: Make a Non-Deductible contribution to a Traditional IRA, then immediately Convert it to Roth. Since you didn’t take a deduction, the conversion is tax-free (mostly). - Mega-Backdoor Roth: The standard limit is small ($7,000). But via a 401(k) “After-Tax” bucket, you can contribute up to ~$69,000 total and convert it instantly to Roth. This is the “Ferrari” of retirement savings.
The Pro-Rata Rule (Cream in Coffee)
Critical Warning: You cannot just convert the “new” money. If you have existing Pre-Tax IRA money (Rollover IRA), the IRS treats your conversion proportionally (Pro-Rata). It’s like trying to spoon only the fresh cream out of a mixed coffee. You MUST empty your Traditional IRAs (e.g., roll them into a 401k) before doing a Backdoor Roth to avoid a surprise tax bill.
Mechanic: The Tax Bracket Arbitrage
Simulation: The RMD Bomb vs. Roth Strategy ($2M Portfolio at Age 75)
| Feature | Traditional 401(k)/IRA | Roth 401(k)/IRA (via Backdoor) |
|---|---|---|
| Tax Timing | Deduction Now, Tax Later | Tax Now, Tax-Free Forever |
| RMDs (Required Withdrawal) | Yes (Starting Age 73) | None (Keep growing forever) |
| Tax Risk | Vulnerable to future rate hikes | Immune to future tax laws |
“A Traditional IRA is a partnership with the IRS, where they decide the future split. A Roth IRA is a declaration of independence. You pay the ransom once, and the money is yours forever.”