2015 Plan B: Mega Backdoor Roth IRA

My plan has always been to pay off the mortgage after maxing out all tax-advantaged investment accounts available to me. When I first made the mortgage payoff plan, I only had access to an employee-contribution 401(k) of $18,000 and a Roth IRA of $5,500 in 2015 dollars. It is possible (I don’t know yet) that with my new employer, I’ll have access to the Mega Backdoor Roth IRA. This is where the employee contributes after-tax up to the total 401(k) annual maximum of $53,000 in 2015 and then you use in-service distribution to transfer the contributions to a Roth IRA and the earnings to a Traditional IRA (and then convert the small bit of earnings to the Roth IRA to keep things clean).

Since I don’t know whether or not I’ll have access to the Mega Backdoor Roth IRA at my new job, I made a plan for 2015 assuming I don’t and then this is my plan for if I do. I’ll go with whichever plan pans out.

The 401(k) maximum is $53,000 in 2015. The maximum employee contribution is $18,000, which I will contribute pre-tax, leaving $35,000 for my employer’s contributions and after-tax contributions. This will leave me approximately $31,425 to contribute after-tax, which is about $2,856/month averaged over 11 months or $2,618.75/month averaged over 12 months. This is clearly going to put a dent in my mortgage payoff plan, but I think it’s worthwhile.

I project my total net pay in 2015 to be $118,142.85. I also expect to have $24,000 extra in my savings account at the end of 2014, after the $5,500 for my 2015 Roth IRA.

The first $18,000 of this goes towards maxing out my 401(k). Then $34,611.43 for monthly spending plans (this includes the mortgage payment). My current plan is $550.00 to my Health Savings Account.

This leaves $88,981.42 of money to work with, including the extra savings account money. Some portion of this money will be funneled into the ESPP with a good discount, but I only see that as a cash flow annoyance since I plan to sell the ESPP funds once their holding period is up.

Next, I’ll fill up the after-tax 401(k), leaving me with another $57,556.42. I’ll throw all of that at the mortgage. I had planned on throwing $73,806.93 at it from savings in 2015, so that’s only $16,250.51 less than planned, which isn’t so bad. This would leave me with the following financial structure at the end of 2015:

  • $20,000 general savings
  • $2,800 Health Savings Account
  • $119,400 Traditional 401(k)s
  • $6,800 Roth 401(k)
  • $73,500 Roth IRA
  • $26,800 taxable investments
  • $75,500 mortgage balance
  • $659,000 net worth

I would then be able to pay about $25,746.63 extra on the mortgage in 2016 and in 2017, which should erase it save for $1,902.56, which I would take out of my $20,000 general savings account. Even if I don’t quite pay it off before the rate resets in January 2018, it will not reset high enough that I can’t afford the payment and I think that is worth it for taking advantage of the Mega Backdoor Roth IRA. I mean, an extra $30,000/year in a Roth IRA in my late twenties is too amazing of an opportunity to pass up. So then in 2018, once the mortgage is fully paid off, I’ll be able to save approximately $38,074.47 outside of tax-advantaged accounts. Note that all of these calculations also assume no raises, no appliances dying, and expenses in general not going up.

The only annoying thing about the Mega Backdoor Roth IRA is that it’ll make my checking account cash flow negative most months since gross pay – taxes – pre-tax 401(k) – ESPP – after-tax 401(k) is less than my monthly spending plan. That’s okay – I can use my signing bonus and savings account to smooth out my cash flow, plus the ESPP funds will be able to be cashed in at various intervals.

Readers, do you take advantage of a Mega Backdoor Roth IRA? How does it impact your cash flow? Would you if you had access to one?

11 thoughts on “2015 Plan B: Mega Backdoor Roth IRA

    • It seems to be becoming more common lately or at least it’s getting some press. My current plan doesn’t allow it, but one of the companies I was considering does, so maybe this one does. It seems pretty sweet to me! Stuffing an extra $30k/year into a Roth IRA is amazing.

  1. Hopefully you get this with your new employer. I have been doing this for years. I don’t know if you know 100% that you don’t have match, but if you do, make sure to budget to be sure you max out the match depending how it works (I assume a small mid year pay bump in my own calculations).

    Your awareness that this budget is separate from roth ira budget (53+5.5) is correct and took me a while to determine with confidence when I first starting doing this (though almost no one had written about it at the time).

    Another nifty thing few seem to have is lump sum contributions by check to the after tax 401k (I have this) – so I just max out in one cashiers check as soon as I have earned sufficient income. I basically max out everything as early as possible while still earning full match. If you ever need to withdraw the money (hopefully don’t but ability is a comfort), priority rules are here: http://fairmark.com/retirement/roth-accounts/roth-distributions/distribution-overview/. Taxable portion of the conversion gets penalties if withdrawn <5 years so to the extent you can minimize taxable portion without hurting yourself it is better. Useful to track this stuff in a spreadsheet since you can end up with a lot of pre-59.5 penalty free withdrawable money if you need it one day.

    While this is close to 100% the rational move vs saving taxable, I am sometimes a bit sad at not having that much money in taxable due to putting like 35k in a roth each year.

    • I hope so too! Oh I do have match and I know what it is, just not the exact method that I’ll have to use to get it. I’ll probably still be at my current job for a tiny bit in January, but I’m going to leave all of the 401(k) contributions to the new job for simplicity.

      Ooooh lump sum would be amazing for this! I would totally do that. Agreed on it being a bit sad to not be putting this money in taxable, but it seems mostly better to me. I have been keeping some level of records on my IRA transactions. I think I need an improved spreadsheet somewhat because it’s not complex enough to deal with this.

  2. The 30k additional in a roth when you’re under 30 will be amazing. I find myself with goals I’m working toward and something comes along and the numbers speak to you. The numbers don’t lie and aren’t emotional.

      • I can’t currently, just been doing the regular back door roth since 2008 (I’m old, just turned 33). I think I’m done front loading my retirement accounts. I probably will continue the $5500 roth ira contributions. I wish I had the opportunity to do it in my twenties. I’m just glad I have my retirement fully funded since we have a new baby now.

        I’m focusing on investing in taxable accounts now. Good old vanguard account and I just started a betterment account recently actually.

        • What do you mean you’re done front loading your retirement accounts? Did you save aggressively in your 20s and now you’re planning on slowing down a bit? Why are you focusing on investing in taxable accounts now? How are you liking Betterment so far?

  3. I have enough to retire at 55-60 with retirement acccounts. I can put in more and utilize early withdrawal methods, but I want a well rounded portfolio. I added couple properties since 2010. Now I want to pump up my taxable accounts. I can probably hit FI in my late 30s when I get to 2 or so million, but I’m starting to realize I like working.

    Betterment is pretty good so far. I like how you can set up separate portfolios with different goals, allocation and time. I’m mainly using it for tax loss harvesting. We’ll see how that works out end of next year.

    • Sounds like you have a pretty well-rounded portfolio! I’m planning on using early withdrawal methods, especially since the tax deduction now is pretty sweet – saving me about $5k/year in federal taxes.

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