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.
2010 Shenanigans
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!
Dr. Dahle. Thanks again for what you do. I read your mail everyday first thing in the morning! Can you please double check this statement ” by the end of 2021 we had contributed a grand total of 569,500 to ROTH IRAs”. It adds up to 550,000 not 569,500 ($326,500+$223500)
Why should I double check anything when I have you? I get the same totals as you on the charge. The difference, $19,500, was the 401(k) contribution limit for a while. I don’t have the original spreadsheet I did this with so I’m not sure if the spreadsheet is right or the total I used was right. Doesn’t really matter I suppose in the bigger picture.
Congratulations Dr. Dahle and Ms. Katie!! Very impressive.
Does Backdoor Roth IRA/ Mega type has any annual contributions limits.
My tax guy is not so much knowledgeable about it. Any suggestions for who to contact to set it up.
Thanks again for all you do. You have already saved me thousands by your expertise.
The maximum that you and your employer combined can put into your 401(k) plan is $61000, or $67,500 if you’re age 50 or older. To calculate how much you can put into the plan’s after-tax portion this year, subtract your 401(k) contributions and your employer’s matching contributions from that maximum. (You’ll have to add up what you and your employer have contributed so far, and estimate what will be contributed for the rest of the year.) The remaining amount is the total you can put into the after-tax portion of your 401(k).
If you don’t get an employer match, you’ll be able to stash the full amount into the after-tax bucket. If you get a match, then that amount will be reduced by the match.
In 2022, the maximum Backdoor Roth IRA contribution limit is $6,000, or $7,000 if at least age 50.
Thanks for the detailed answer. Appreciate it.
IRA contribution limit for 2022 for those under 50 is $6K.
The 401(k)/SEP-IRA limit for those under 50 is $61K total between employee and employer contributions. How much of that will be MBDR contributions depends on the plan structure.
The Backdoor Roth IRA is easy to do anywhere. See these posts:
https://www.whitecoatinvestor.com/backdoor-roth-ira-tutorial/
https://www.whitecoatinvestor.com/how-to-do-a-backdoor-roth-ira-with-vanguard/
https://www.whitecoatinvestor.com/how-to-do-a-backdoor-roth-ira-at-fidelity/
As far as a Mega Backdoor Roth IRA, it’ll need to go through your employer. Your current plan may not allow it.
I agree that (Backdoor) Roth IRAs are worth it, especially if it’s a choice between that and a taxable account. But it’s pretty obvious from your numbers that if you consider only your small yearly Roth contributions, you’d be nowhere close to being a Roth millionaire. And this goes double for a single person. Don’t think you’d get there in a few more years either, even as a couple. So I think the message is: If you want to be a millionaire, you’ve got to do more than just a yearly Roth IRA contribution.
Just need more time, but I agree with your overall point that saving $12K a year isn’t enough for the typical reader of this post.
I started my career as a nurse in 1987, putting about 2k in my retirement for 2 years. I then rolled that over to an IRA when I became a contract nurse. I put in max to IRA till we didn’t qualify any more, and in 1998, when my husband had a lower income year, I rolled it all over to a ROTH. For many years I didn’t add anymore as we didn’t qualify, until I learned about Back door Roth. I’ve been putting in the max since then, including the over 50 years old 1k more. As of 12/31/2021, before the stock market drop, I had 600k, just from Roth yearly maximums, even though there was a period of years I wasn’t allowed to fund at all. My husband did similar, but he also had some Roth Conversions from his R/O Traditional , so I’m not going to include him. But we together could easily be over 1 million if he had done the same as me. We are well over 1 million with his conversions. I know I had a lot in Vanguard Health Care at the beginning, and that was doing very good for awhile. So no, not close to 1 million for me, but 600k is a good amount for no more than a 7k per year deposit.
Wow! This is a totally new concept for me. I never knew you could transfer money from a regular IRA into a roth. Looks like it’s worth looking into more! Thank you!
Hmm but what about the gov’s attempt to stop all conversion of roth ira in the now-almost-certain-dead Build Back Better bill and possibly another separate bill like Secure 2.0 that may repeal backdoor IRA. Should we just wait for the end of the year or save/convert/invest our backdoor as if nothing will happen?
Can you share something about SECURE 2.0 and repealing backdoor Roth? I read a few articles about the proposals but didn’t see anything about disallowing Roth conversions. Much of what was written included expanding/simplifying options for retirement account access. Many citizen have likely performed their backdoor Roth process for 2022, it would be a mess to have to sort that out with retrograde rules. Any changes likely antegrade for 2023 if & when the ink is dry.
I see that risk as a reason to do it early in the year, not late. It’s unlikely to be done retroactively (it’s also unlikely to be done mid year).
Why wait? It’s legal now. I wouldn’t waste time or money worrying about what “might” happen.
1) Dr. Dahle…..what do you put as your asset allocation in your Roth IRAs ….i.e. which Vanguard funds do you put in your Roths?
2) Could you explain how one qualifies for a MegaBackDoor Roth and how one does it?
Thanks!
1) I look at my entire asset allocation together as one big account across Roth IRAs, 401(k)s, and taxable account. Right now my Roth IRA is entirely the Vanguard REIT index fund and Katie’s is the Vanguard Small Cap Value Fund. But both of those funds are also held elsewhere because we can’t make up our entire allocation for either of them in a single Roth IRA.
2) More info here:
https://www.whitecoatinvestor.com/the-mega-backdoor-roth-ira/
https://www.whitecoatinvestor.com/new-mega-backdoor-roth-ira/
Fidelity has a little hack with some 401k plans which allows you to automatically convert your after tax 401k contributions to Roth 401k. I had to call to get it setup but it works out great.
It’s usually easy IF the plan allows it. That’s the key point.
I thought Fidelity does not offer a Roth 401K option in its Solo 401K plan(?)… Unless you are talking about non-Solo 401K plan?
Jim congrats on you and Katie hitting the 2 comma club in the Roth! Just to clarify if you leave an employer, any after tax retirement contributions can be rolled over to a Roth IRA? Can you always do a Mega backdoor roth when you leave an employer if you had after tax contributions?
Yes. Pretty much. Might need to isolate basis, but you can typically do that as you rollover-after tax and Roth to a Roth IRA and pre-tax to a traditional IRA or other 401(k).
Dr. Dahle, question regarding 403b plans. Recently the private group I worked for was taken over by a large non profit health care system. In researching the 403b, it has no after tax contribution ability, so no chance in doing a Mega Backdoor Roth. My question, should I try to go to the trouble to get this after tax option in the plan, and inservice Roth conversion and/or in service out of plan rollovers. Do others in my situation actually have this option in their non profit system 403B, or is this just a pipe dream? Not going to upset the apple cart if no one else has this option. Thank you.
Not sure I’ve seen one in a 403b before. Doesn’t mean it couldn’t happen though. Chances of you getting changes in a large non profit health care system 401k are low anyway.
Are there income limits for the employer contribution that would preclude the employer from putting in the entire employer contribution into the Roth solo 401k portion ?
First that wasn’t allowed until Secure 2.0 passed. More info here:
https://www.whitecoatinvestor.com/secure-act-2-0/
Second, no, an employer can put your entire salary into a 401(k) as a match.
My group offers a mega backdoor Roth in-plan conversion with my 401(k). Assuming I’ve maxed out my pre-tax and employer contributions to my 401(k), I’m having trouble deciding if I should place additional savings in a taxable brokerage account or in this 401(k) through the mega backdoor Roth option. Thoughts on which to prioritize?
Thank you! As always, your stuff is unbelievably helpful!
I’d do the MBDR over taxable.
I thought that would likely be the answer. And this is true to prioritize the MBDR even if I’ll be a 1st-year attending and have no savings in any taxable accounts? (All are in a 403(b), Roth IRA, and tiny emergency fund in a high-yield savings account, currently.)
Sure. Why not? What are you concerned about exactly? Do you want to use the money for something besides retirement? If so, then sure, use a taxable account. But otherwise, I’d use the tax protected, asset protected account first. You’ll likely pick up a taxable account at some point, no need to rush it. You don’t even have to have one really, even if you retire early.
Makes sense. I guess my concern was regarding liquidity, but assuming that all of this extra money I’m shoveling in is only for retirement, that shouldn’t matter.
Greatly appreciate all you do. Thank you!
There are two types of liquidity. The first is the ability to turn the investment to cash. That has nothing to do with the account. The second is taking the money out of the account. That’s easier with taxable, but not impossible with a retirement account. If you can’t come up with a valid exception to the 10% rule, then you just pay the 10%. If it’s pre-tax, obviously you have to pay the taxes just like you would any capital gains taxes in the capital account. Easier to come up with capital losses to cover those though.
Got it. Appreciate the clarification on all of that. Thank you!