Mastering the Backdoor (& Mega Backdoor) Roth IRA

Welcome to Radhika’s Newsletter “Intent”. This is your tri-weekly guide to purposeful living, wealth-building, and personal growth.

Happy Tuesday! I’m so excited to share this edition of Intent. Today’s topic is all about the Backdoor Roth IRA and the Mega Backdoor Roth IRA. We'll explore why they matter, how they work, and how they can transform your path to financial independence by unlocking powerful strategies for building long-term wealth. Let’s get started!

What I’m Sipping On This Month

This month, I’m sipping on Soba Tea, known as ‘soba cha’ in Japanese. I was able to try this very unique tea at a local Soba restaurant where the chef specializes in hand made soba noodles fresh made everyday. It has a very distinct toasty, nutty flavor that reminds me of roasted grains or nuts. It had a very comforting smell to it which makes it a great tea to drink anytime of day.

Soba is essentially buckwheat which contains Vitamin E and supports the immune system in regulating digestion and reduces inflammation. Bonus perk: because this does not come from a ‘tea plant’, there’s no caffeine in soba tea.

Traditional IRA vs. Roth IRA

Good news! You still have time to contribute toward your 2024 IRA limits—the deadline is April 15th, 2025!

Roth IRA Income Limits

Roth IRA income limits for 2024

The Roth IRA income limit to make a full contribution in 2024 is less than $146,000 for single filers, and less than $230,000 for those filing jointly. Essentially, if you make less than those amounts (depending on your filing, you can contribute to your Roth IRA normally, just by transferring money into that account. If your income is higher that that amount, then you are INELIGIBLE to contribute to a Roth IRA (This is where the backdoor Roth IRA comes into play).

Note: If you’re a single filer, you’re eligible to contribute a portion of the full amount if your MAGI (Modified Adjusted Gross Income) is $146,000 or more, but less than $161,000. For those married filing jointly, the income range to contribute a portion of the full amount is $230,000 or more, but less than $240,000.

Modified Adjusted Gross Income (MAGI) in the simplest terms is your Adjusted Gross Income (AGI) plus a few items — like exempt or excluded income and certain deductions.

Roth IRA income limits for 2025

The Roth IRA income limit to make a full contribution in 2025 is less than $150,000 for single filers, and less than $236,000 for those filing jointly.

Note: If you’re a single filer, you’re eligible to contribute a portion of the full amount if your MAGI is $150,000 or more, but less than $165,000. For those married filing jointly, the income range to contribute a portion of the full amount is $236,000 or more, but less than $246,000.

Source: Fidelity Roth IRA Income Limits

Backdoor Roth IRA

Because the Roth IRA has Income Limits, most people, at some point in their life are cut off from contributing to this vehicle once they’ve reached that limit. A backdoor Roth IRA may be particularly appealing to those who earn too much to contribute directly to a Roth IRA.

Sooooo… the big question…how does it work?

Step 1: Put money in a traditional IRA. You might already have an account, or you might need to open one and fund it.

Step 2: Convert your contribution to a Roth IRA. Your IRA administrator will give you the instructions and paperwork. If you don’t already have one, you’ll open a new Roth IRA during the conversion process. When it comes to rolling over your money, you can choose to convert any amount you'd like: rollovers are not subject to the annual $7,000 limit.

Step 3: Be careful with the Pro-Rata rule and calculate how much taxes (if any) you’ll need to pay for a conversion.

When determining your tax bill on a conversion from a traditional IRA to a Roth IRA, the IRS is going to look at all of your traditional IRAs combined.

If all of your traditional IRAs combined consist of, say, 70% pretax money and 30% after-tax money, that ratio determines what percentage of the money you convert to a Roth is going to be taxable. In this example, no matter how much money you convert or which IRA you pull the money from, 70% of the amount you convert to the Roth will be taxable. You can't choose to convert only after-tax money; the IRS won't allow it.

That being said, here’s a resource on how to avoid the extra taxes and the pro-rata rule. Essentially, to avoid the Pro-Rata Rule, you will first need to remove all the pre-tax money from the account.

And watch out: the IRS applies the pro rata rule to your total IRA balance at year-end, not at the time of conversion.

Source: Nerd Wallet Backdoor Roth IRA Guide

Mega Backdoor Roth IRA

In the most simplest of terms: a mega backdoor Roth refers to a strategy that can potentially allow to transfer certain types of 401(k) contributions into a Roth - including a Roth IRA and/or Roth 401(k). This is a very complicated process and there are lots of considerations to make before executing this strategy:

1. Max out Pre-tax Contribution. You must make the maximum pre-tax contribution to your 401(k) plan for the year. For 2024, the maximum pre-tax contribution is $23,000 for all accounts(For 2025, it’s $23,500). You must then still have the cash to contribute additional funds beyond the standard limit, which you will use for the mega backdoor Roth strategy.

2. Your 401(k) plan allows after-tax contributions After-tax contributions are a separate category of money from your traditional 401(k) contributions. The dollars you put into an after-tax bucket are post-tax, so you've already paid taxes on them. This requirement is pretty straightforward: Either your employer plan allows after-tax contributions, or it doesn’t. Ask your HR if you’re unsure.

3. Your 401(k) lets you move your after-tax money. Your employer has to offer either in-service distributions to a Roth IRA or lets you move money from the after-tax portion of your plan into the Roth 401(k) part of the plan. If you’re not sure, ask HR. If they don’t allow for it, you might have to wait until you decide to leave your employer.

   1. To explain the benefit of the Mega Backdoor Roth IRA here: With this strategy, you’re moving the after-tax money into your Roth account. If you leave your after-tax contributions in the after-tax bucket, which is a tax-deferred bucket, you’re going to eventually owe tax on those earnings. But once that money is in a Roth, it grows tax-free. The point is to get as much money into the Roth as soon as possible to get as much tax-free growth as soon as possible (both on earnings & contributions).

4. You’ve got money left over for savings

   To reiterate, this strategy is really for people who have a lot of money to put aside for savings. A mega backdoor Roth allows high-earning investors: who otherwise couldn't put money in a Roth account because of income restrictions, to move money from a 401(k) plan to a Roth IRA or Roth 401(k) plan.

Source: Nerd Wallet Mega Backdoor Roth IRA Investing

Why the Roth IRA lets you live with Intent

Living with intent means making choices today that align with the future you envision. A Roth IRA embodies this philosophy by prioritizing long-term financial freedom and security. Here's how:

1. Tax-Free Growth, Future Freedom: By paying taxes on your contributions now, you free yourself from the uncertainty of future tax rates. This intentional choice provides peace of mind, knowing your investments grow tax-free and withdrawals in retirement won’t come with surprises.

2. Flexibility for Life’s Goals: Roth IRAs allow you to withdraw contributions at any time without penalties, offering a safety net for unexpected expenses or big life moments like buying a home, starting a business, or funding a dream vacation. It’s an intentional financial tool that grows with your needs.

3. Legacy with Purpose: Unlike other retirement accounts, Roth IRAs don’t require mandatory withdrawals during your lifetime. This means you can intentionally pass on wealth to your loved ones, leaving a legacy that reflects your values and life’s purpose.

4. Empowered Financial Planning: Contributing to a Roth IRA requires thinking ahead: balancing today’s income with tomorrow’s goals. This deliberate approach forces you to examine your spending, saving, and investing habits, ensuring every dollar is aligned with your life’s bigger picture.

A Roth IRA isn’t just a retirement tool; it’s a way to live intentionally - making decisions today that pave the way for a fulfilling, secure, and purpose-driven future.

Support My Work

If you haven’t already, check out my book From Ramen Noodles to Riches to learn more about building a strong financial foundation. Whether you’re just starting out or looking to take control of your money, this guide provides practical tips on budgeting, saving, and growing your wealth.

Enjoying this newsletter? If you’d like to support my work, you can buy me tea. Your support means so much! Every cup helps fuel the ideas, research, and energy I put into each newsletter.

Thank you so much for being a part of the Intent community. I rely on word-of-mouth for growth. If you enjoyed this newsletter, I’d love for you to share it with a friend. Your commitment to living with purpose is exactly why this space exists. Also, I’d love for this newsletter to be a two-way conversation. If you’re navigating a big life pivot, considering a tough decision, or simply trying to figure out your next steps, feel free to share your stories, ideas, or questions.

Can’t wait to share more in the next edition!

Until next time,
Radhika
Creating a life of purpose, wealth, and growth.