Freed by 50

Earlier this year I updated my goals for 2020 and described how I’d investigated the possibility of doing a backdoor Roth to move my IRA into a Roth IRA. In the end, I found that my current tax rate is far too high for this to make sense for me. My current tax bracket is way higher than it will ever be in retirement, so I would be paying high taxes on money now when I could pay lower taxes on it later.

Last month, I noticed an unexpected large jump in my paycheck and realized that because I’d front loaded my 401k contributions, I’d hit the maximum contribution limit for 2020. Yay. But that left me with quite a bit of money to find a home for each month.

In an interesting twist of fate, days after hitting the 401k limit, my company emailed everyone to say that they were enabling an “in plan Roth conversion” option for after tax contributions, aka Mega Backdoor Roth.

This blog is currently a chronical of my time spent achieving financial independence and not a place to explain financial moves. Some day I may delve into that, but today is not that day. A simple explanation is that the Mega Backdoor Roth will allow me to funnel up to $34,500 of after tax dollars per year through my 401k and into a Roth IRA, circumventing any eligibility requirements or Roth contribution limits. And it’s totally legal!

Since I’ve been investing far more than $34,500 per year in my individual investment account anyway, this seems like a no brainer. Instead of paying taxes on investments twice, I can now stuff over $30k/year into a tax advantaged Roth and watch it grow untaxed forever!

Needless to say this is a very exciting moment for me, and I had to resist the temptation to try to contribute 100% of my paycheck from here to the end of the year to reach the 2020 limit. Looks like I have a new goal for 2021!