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Commentary & Insights

Insight, Financial Planning

Mega-backdoor Roth Conversions Through the UC Retirement Plan

11 March 2024

By James Weimer

You have likely heard of a Roth IRA, and maybe even a backdoor Roth IRA. But you might not be familiar with a “mega” backdoor Roth IRA. As we’ve set the foundation with a general overview of the UC Retirement Plan in previous Insights, we can now get into how and why you would consider this strategy and how the Designated Contribution (DC) plan makes it work. 

Backdoor Roth Basics

Roth IRAs are funded with dollars that have already been taxed. You take the tax-hit up front, but your reward is to never pay taxes on those dollars ever again, no matter your tax bracket and no matter what the balance has grown to. Roth accounts provide tremendous flexibility in retirement for UC employees expecting to receive a lifetime pension and remain in a higher tax bracket as a result. 

However, if your income is too high, you will not be able to contribute directly to a Roth IRA. Instead, you can engage in the “backdoor” Roth strategy. This involves moving after-tax money from a traditional IRA into a Roth IRA. Anyone can do this, regardless of income level (but be careful: if you have a pre-tax money in a traditional IRA, the conversion may be taxed due to the IRS’ pro-rate rule), 

Mega-Backdoor Roth 

The catch with either regular Roth IRAs or backdoor Roth IRAs is that annual contributions are limited to $7,000 in 2024 ($8,000 if 50 or older). If you have more to save, here is where the UC supplemental accounts provide a great opportunity. 

An example will make this easier to understand: 

If you are 45 years old and maxing out your 403(b) at $23,000/year with either pre-tax or Roth deferrals, you would be eligible to contribute an additional $69,000 into the DC after-tax account. At any time during the year, the $69,000 after-tax balance can be converted to an outside Roth IRA, or the Roth portion of your 403(b). 

Using the example above, if your $23,000 403(b) deferrals were Roth deferrals you would have ended the year with $92,000 in total Roth contributions. If you also maxed out an outside regular backdoor Roth IRA, that would be an additional $7,000. And, if you also contributed the maximum Roth deferral to your 457(b), that would be an additional $23,000. You would end the year with a total of $122,000 in total Roth savings. If you are 50 or older, the limit is $145,500. 

Conclusion

So why is it called a “mega” backdoor Roth? Contributing up to an additional $69,000 (or $76,500 if 50 or older) per year in Roth dollars qualifies as “mega” savings, especially compared to the $7,000 limit with a standard backdoor Roth IRA. Does this strategy make sense for every UC employee? No. Does it make sense for you? It depends on your goals, whether you have surplus cash flow to save, your tax situation, and plenty of other factors.

The UC Retirement website has their own explanations here and here.