By Dr. James M. Dahle, WCI Founder
Well, we're officially Backdoor Roth IRA millionaires, although I know of no strict definition of what that means and, in fact, I may have just coined the term. But at some point in 2021, our Roth accounts exceeded $1 million. When you look at how it happened, you will quickly see that it was primarily due to the Backdoor Roth IRA (and the Mega Backdoor Roth IRA) processes. Let's take a look at how Katie and I got to be Backdoor Roth IRA millionaires.
Our first Roth IRA contributions (and really our first investment of money we had earned ourselves) took place in the spring of 2004. We put in the maximum—$3,000 apiece. We were both working and earning what we felt was good money (I was making $37,000 as an intern and Katie was teaching school), and we felt flush with cash. We had money coming out of our ears. So, we put $6,000 of it into Roth IRAs. We continued that good habit throughout the rest of residency and into our years of military service:
That's a total of $50,000 invested. Now, none of these were Backdoor Roth IRA contributions. The Backdoor Roth IRA process wasn't allowed from 2004-2009 (and might not be again if some in Congress get their way), and we didn't make enough money to need to contribute indirectly through the Backdoor Roth IRA process, anyway.
I don't have access to any statements from 2009, but I do have a spreadsheet tabulating net worth for each year. Keep in mind that I became an attending in 2006 and started contributing to the military 401(k) system known as the Thrift Savings Plan. I had also put a little bit of moonlighting money into a SEP IRA. But my spreadsheet tells me how much my investments actually earned during those years.
In 2004, our investments made $700. In 2005, we made $1,200. In 2006, we made $5,600. In 2007, we made $3,500. In 2008, we lost $41,000, and in 2009, we made $48,000. Our money was growing bit by bit, mostly from contributions but also from earnings. By the end of 2009, our investment portfolio was worth $184,417. I think it's fair to assume that about half of that was in Roth IRAs.
Lots of stuff happened to us in 2010. The first was that the Backdoor Roth IRA process became legal. As a good little Boglehead, I was aware of that, so early in 2010, we made our Roth IRA contributions via the Backdoor. I was coming out of the military that year and figured our income might be too high for direct contributions. It didn't turn out to be that way. But since anyone can do a Backdoor Roth IRA even if their income is too low to need it, it wasn't a big deal. But to avoid being pro-rated, I had to do something with that SEP IRA. So, I converted it to a Roth IRA, too. I wouldn't call that any sort of “Backdoor” process, since it was a fully taxable event.
While deployed in 2007-2008, I had made some after-tax Thrift Savings Plan contributions. Upon separating from the military in 2010, I isolated that basis and converted it to a Roth IRA, further boosting my Roth IRA balance. This was much more like a Backdoor Roth IRA—really a Mega Backdoor Roth IRA before anyone was calling it such.
The Backdoor Roth IRA Years
We continued to do a Backdoor Roth IRA every year. It looked like this:
Aside from that aberration in 2010, all that had gone into our Roth IRAs were the maximum IRA contribution each year. By the end of 2018, my Roth IRA balance was $201,286 and Katie's was $134,790 for a total of $336,076. A great start, but nowhere near being Roth IRA millionaires.
Enter the Mega Backdoor Roth IRA
In 2019, changes to the tax code (the 199A deduction) and our business structure (S corp) meant that it started making sense for us to do Mega Backdoor Roth IRA contributions in the WCI 401(k), at least for any employer contributions. In addition to our usual Backdoor Roth IRAs, I did a Mega Backdoor Roth IRA for my entire 401(k) contribution ($56,000), and Katie did a $19,000 employee contribution to a traditional 401(k), leaving a $37,000 Mega Backdoor Roth IRA contribution in 2019. She did the same thing in 2020.
In 2020 and 2021, I continued to do the Mega Backdoor Roth IRA contribution each year. In 2021, Katie did both an employee Roth 401(k) contribution and a Mega Backdoor Roth IRA contribution. We continued to do regular Backdoor Roth IRA contributions each year. Recognizing we were supersavers, I started doing Roth 401(k) employee contributions with my partnership 401(k) (no Mega Backdoor Roth provision) in 2020 as well. Our total Roth contributions, thus far, looked like this:
By the end of 2021, we had contributed a grand total of $569,500 to Roth IRAs. If you consider everything that was originally contributed as after-tax money (i.e., Backdoor Roth IRA and Mega Backdoor Roth IRA), that accounts for $460,500 (81%) of it. What was our balance? I had $548,617 in my Roth IRA, Katie had $398,060 in her Roth IRA, I had $77,882 in my WCI Roth 401(k), Katie had $64,521 in her WCI Roth 401(k), and I had $46,780 in my practice's Roth 401(k).
Grand total? $1,135,860
We were Roth IRA millionaires. Even cooler, 50% of the money in those Roth IRAs/401(k)s was money that our money has earned over the previous 18 years.
When people tell you that a mere $6,000 Backdoor Roth IRA contribution isn't worth your time, remember this post. Small contributions over time add up, especially as compound interest works its magic. Sure, the small Roth conversion and Mega Backdoor Roth IRA in 2010—and especially the big Mega Backdoor Roth IRA and direct Roth IRA contributions over the last few years—made a big difference. But we would have gotten there with a few more years of compound interest on the regular Backdoor Roth IRA contributions.
Slow and steady wins the race. But for the first decade or two of savings, brute force saving matters far more than your investment return. Focus on your income and savings rate, and the snowball will soon begin to roll faster than you ever imagined.
Backdoor Roth IRA contributions and, when appropriate, Mega Backdoor Roth IRA contributions can provide a substantial tax-free nest egg for your retirement along with valuable tax diversification and asset protection. Don't miss out on this great benefit while it lasts.
What do you think? How long have you been doing Backdoor Roth IRAs? How much do you have in your Roth IRAs and 401(k)s? What is your ratio of Roth to tax-deferred retirement assets? Comment below!