Roth Mega Backdoor, Trad vs Roth 401k at age 22

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Topic Author
AgonyInAustin
Posts: 3
Joined: Thu Jan 30, 2025 2:23 pm

Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by AgonyInAustin »

Hi Bogleheads,

I've been reading Bogleheads.org and other retirement resources diligently - so thanks to all in advance and appreciate any and all feedback.

For context, recent college grad in a solid field with reasonable room for growth. I've run a business in the last two years of college, as well as saving/investing diligently from part-time jobs, tutoring, internships, etc. I've always been interested in investing/retirement planning/FIRE, and I've done what I feel like is a lot of research in the area. However, I'm currently at a crossroads for how much risk to take, and where to take it, given I'm interested in retiring early.

PORTFOLIO INFO:


Emergency funds: Yes (~6 mons expenses, but I live at home so very minimal)

Debt: None
Tax Filing Status: Single (w/ pass-thru LLC side biz)

Tax Rate: 22%+ Federal (depends on business volume)

State of Residence: TX

Age: 22

Current retirement assets:

Current Asset allocation: 100% stocks / 0% bonds
Current International allocation: 30% of stocks

Taxable Brokerages: $60k (~equal in FNILX, FZILX, FZROX)
Roth IRAs: $60k (80% in FNILX/FZROX/FZILX) (rolled over a Roth 401k from an internship)
Cash: ~$15k-$20k in Chase (commingled funds for my business, working on better segregation)

Contributions:

$7k Roth IRA match (been maxing for a couple years)
$23.5k to Trad 401k (~5k match, depends on bonus)
~$41k to After-Tax 401k (Plan allows for MBR)

Questions

1. Is it wise to contribute so much to a MBR at such a young age, are there any potential downsides? My expenses are very low, and my side-hustle income is sufficient for my wants/needs for now.

2. I'm unsure of whether I want to continue working or try to retire early, so should 401k contributions be split between trad/Roth?

3. In terms of allocation, if I'm targeting an early retirement ~15 years from now, should I be buying target date 2040 funds, or is remaining 100% in equities worthwhile? I believe I can stomach a 30%+ drop in portfolio value, but not sure.

Additionally, if anyone has advice on whether pursuing an MBA with sponsorship is worth the opp. cost of 2 years' salary feel free to share insights :happy

Thanks again!
Mattman25
Posts: 165
Joined: Wed Nov 01, 2023 1:38 pm

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by Mattman25 »

1. Early in your career is the absolute BEST time to do a mega backdoor Roth. Do it every year after maxing out your other tax-advantaged accounts such as HSA and Backdoor Roth IRA.

2. If you elect Trad 401(k) for your employee deferral and do the mega Backdoor Roth you will effectively be splitting the difference already and have a good mix of trad and Roth. Plus you get the immediate tax savings by deferring in traditional.

Other thoughts:
- I would not have bought proprietary Fidelity Mutual Funds in your taxable brokerage account, because now it is much harder for you to move them because of the tax consequences of selling those funds. I usually stick with ETF’s in taxable for those portability reasons.
- I would not buy the exact same funds in both IRA and taxable because you could trigger the Wash Sale Rule. Look it up on the wiki if you are unfamiliar.
- You can’t do an online or nights/weekend MBA program without quitting your job?
- Make sure you have adequate disability insurance, and if you have any dependents look into term life insurance.
exodusNH
Posts: 11729
Joined: Wed Jan 06, 2021 7:21 pm

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by exodusNH »

AgonyInAustin wrote: Fri Jan 31, 2025 8:33 am Is it wise to contribute so much to a MBR at such a young age, are there any potential downsides? My expenses are very low, and my side-hustle income is sufficient for my wants/needs for now.
After-tax 401k money can't always be rolled out into a Roth IRA while you're still employed. You'll have to ask if they allow "in service rollovers." If you can't, as long as the plan has reasonable fees, it's not a problem.

Since your tax rate is probably as low as it's going to be until you retire, Roth/after-tax 401k are good options.
Topic Author
AgonyInAustin
Posts: 3
Joined: Thu Jan 30, 2025 2:23 pm

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by AgonyInAustin »

Mattman25 wrote: Fri Jan 31, 2025 9:07 am Other thoughts:
- I would not have bought proprietary Fidelity Mutual Funds in your taxable brokerage account, because now it is much harder for you to move them because of the tax consequences of selling those funds. I usually stick with ETF’s in taxable for those portability reasons.
Thought about this long and hard after I bought them - decided the chances I leave Fidelity are negligble so willing to deal w/ portability issues.
Mattman25 wrote: Fri Jan 31, 2025 9:07 am - I would not buy the exact same funds in both IRA and taxable because you could trigger the Wash Sale Rule. Look it up on the wiki if you are unfamiliar.
Was not aware of this - thanks for the heads up. Didn't know it applied across IRA/taxable assets.
Mattman25 wrote: Fri Jan 31, 2025 9:07 am - You can’t do an online or nights/weekend MBA program without quitting your job?
My firm pays for a FT program + stipend for living expenses, and I'd mainly be going for networking/exposure, so FTMBA makes the most sense.
Mattman25 wrote: Fri Jan 31, 2025 9:07 am - Make sure you have adequate disability insurance, and if you have any dependents look into term life insurance.
No dependents, and I believe I get a barebones life insurance policy from my employer - will look into the disability insurance.
exodusNH wrote: Fri Jan 31, 2025 9:12 am After-tax 401k money can't always be rolled out into a Roth IRA while you're still employed. You'll have to ask if they allow "in service rollovers." If you can't, as long as the plan has reasonable fees, it's not a problem.

Since your tax rate is probably as low as it's going to be until you retire, Roth/after-tax 401k are good options.
Luckily I can do in-service rollovers - probably going to move all my assets to the same Roth IRA for simplicity.

Thanks for the help guys - any input on asset allocation? I feel like I'm very aggressive right now.
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krafty81
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Location: San Diego, CA

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by krafty81 »

My kids are a little older than you but my advice is stay 100% equities. Max Roth and 401k, do MBR if you can. Ibonds are a good inflation hedge if you are worried about that. Do you have HSA available?
bradpevans
Posts: 887
Joined: Sun Apr 08, 2018 1:09 pm

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by bradpevans »

The perspective changes depending on:
Traditional OR Roth //
Traditional AND Roth

And i don't think it has to be fill Traditional THEN (mega-backdoor) Roth

That said, if traditional is filled your choices are Roth, Brokerage, Saving account (for the most part)

Roth means no more taxes ever
Brokerage mean tax loss harvest / gain, as well as "step as basis" (inheritance).
Both options are the same impact on your cash flow (ie taxes paid before investing)

Roth could be considered as sort of emergency fund / of course the balance might go down.

The more you save the more options you'll have later:
retire early/earlier
extend time *between* jobs (if needed/desired)
GrumpyFarmer
Posts: 12
Joined: Mon Jan 20, 2025 5:12 pm

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by GrumpyFarmer »

Good day.

I think you have received a lot of solid advice above.

What I would recommend is to try to imagine when you think you would want to retire and then figure out how at that age you fund your early retirement.

Based on that adjust your savings/investing plan to achieve that. You need to get the funds into the correct accounts to fund an early retirement. (Consider order/priority of your buckets of savings and also consider funds for tax efficiency in the taxable bucket).

IMO you have a lot of life of ahead of you if currently at 22. It’s hard to predict what will happen over the years, but I would not focus solely on paying taxes before you have too. If you are able to contribute to pre tax and after tax to the limits that’s great…you are ahead of most. At some point though tax deferral can be helpful too. There is a lot benefit to lowering your taxable income and letting that grow tax deferred. I understand the thought to pay/cry once on the taxes, but that also is an additional monies you could use or save/invest. I think it might not be a bad idea to do the math both ways and see where that puts you. No one knows future tax rates and that includes roths. We can only forecast based on current conditions…but that is not reality, just what we know today.

You can only control what you save and what you spend. Everything else is a variable you can’t control, and that includes the tax rate. What we know today is current law says monies in Roth are not to be taxed again. So it’s current tax rate once in the account is zero. It’s not going to go down…hopefully it stays the same, but the rate can only move one direction from where it is at. People don’t want to hear that, but that’s the reality. Paying tax early is no different than giving your self an extra market correction.

My recommendation is do the math before decide to pay the tax now vs letting it grow tax deferred (sure tax rates could up…but we know Roth tax rate can’t go down). When / if you do the math, need to consider what is the opportunity of how the money could be used if the tax is deferred because it will leave you money to use to buy home, spend or invest. If that is not considered it’s not a fair comparison of the present/future value of current and future assets IMO.

I think you are on the right track. Good luck.
Navillus1968
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Joined: Mon Feb 22, 2021 5:00 pm
Location: FL Tampa Bay

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by Navillus1968 »

AgonyInAustin wrote: Fri Jan 31, 2025 8:33 am Questions

1. Is it wise to contribute so much to a MBR at such a young age, are there any potential downsides? My expenses are very low, and my side-hustle income is sufficient for my wants/needs for now.
Taxable money is obviously more flexible than tax-advantaged money in terms of access prior to 59.5, but the tax-free growth in Roth trumps that advantage, IMHO. Bottom line, there's no real downside to using MBDR.

Additionally, MBDR contributions can be withdrawn before age 59.5 if you wait 5 years after the contribution.
"Does doing the mega backdoor Roth lock up your money? For post-rollover earnings, absolutely. For your after-tax rollover itself, not much at all. If you stack up the rollovers and you always withdraw money from more than 5 years ago, there is no tax nor penalty."
https://thefinancebuff.com/rollover-aft ... 9-1-2.html
Roth IRA contributions can be withdrawn anytime.
You probably should get smart on Roth IRA ordering rules- https://www.investopedia.com/terms/o/orderingrules.asp
2. I'm unsure of whether I want to continue working or try to retire early, so should 401k contributions be split between trad/Roth?
In the 22% bracket, Roth 401k is likely the way to go, unless losing the tax deferral causes some other perturbation to your taxes, loss of tax credits, etc. If you do a rollover of Trad 401k to TIRA after you retire, there are ways of accessing that money penalty-free prior to 59.5. Google IRS Rule 72(t) also known as SEPP withdrawals.
3. In terms of allocation, if I'm targeting an early retirement ~15 years from now, should I be buying target date 2040 funds, or is remaining 100% in equities worthwhile? I believe I can stomach a 30%+ drop in portfolio value, but not sure.

Additionally, if anyone has advice on whether pursuing an MBA with sponsorship is worth the opp. cost of 2 years' salary feel free to share insights
No, I would stay 100% equities for at least the next 10 years & skip the TDF. If you think you might FIRE in your mid/late 30s (!), you can start accumulating fixed income in your early 30s by rebalancing inside your Trad 401k.

Would doing the sponsored MBA tie you to your company for a fixed period? As long as you enjoy working for the company, I say go for it. Probably would help burnish your resume, among other benefits.

PS- Not that it matters, but you omitted your Trad 401k from your list of assets.
Topic Author
AgonyInAustin
Posts: 3
Joined: Thu Jan 30, 2025 2:23 pm

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by AgonyInAustin »

krafty81 wrote: Mon Feb 03, 2025 11:41 am My kids are a little older than you but my advice is stay 100% equities. Max Roth and 401k, do MBR if you can. Ibonds are a good inflation hedge if you are worried about that. Do you have HSA available?
I'm blessed to have amazing, low-deductible low-premium healthcare through my employer, as well as being doubly-covered under my parents, so no HSA (un)fortunately :wink:
GrumpyFarmer wrote: Mon Feb 03, 2025 5:42 pm Based on that adjust your savings/investing plan to achieve that. You need to get the funds into the correct accounts to fund an early retirement. (Consider order/priority of your buckets of savings and also consider funds for tax efficiency in the taxable bucket).
This is what I've been struggling the most with - I understand the fundamentals of all these accounts, taxable/nontaxable, etc, but ordering/bucketing for an early retirement has been tricky.
GrumpyFarmer wrote: Mon Feb 03, 2025 5:42 pm You can only control what you save and what you spend. Everything else is a variable you can’t control, and that includes the tax rate. What we know today is current law says monies in Roth are not to be taxed again. So it’s current tax rate once in the account is zero. It’s not going to go down…hopefully it stays the same, but the rate can only move one direction from where it is at. People don’t want to hear that, but that’s the reality. Paying tax early is no different than giving your self an extra market correction.
I really appreciate this insight - I know Roth accounts are a relatively new creation, and I've seen some speculation on if their tax-protected status will ever change. I personally am not informed enough to guess, but that's all the case for a more balanced approach.
GrumpyFarmer wrote: Mon Feb 03, 2025 5:42 pm My recommendation is do the math before decide to pay the tax now vs letting it grow tax deferred (sure tax rates could up…but we know Roth tax rate can’t go down). When / if you do the math, need to consider what is the opportunity of how the money could be used if the tax is deferred because it will leave you money to use to buy home, spend or invest. If that is not considered it’s not a fair comparison of the present/future value of current and future assets IMO.
Great point - I just feel like I'm naturally already diversified against tax rate movements given 23.5k in trad and ~40k in MBDR. Is there any feasible way of getting more of my income tax-deferred if I want to hedge in that direction?
Navillus1968 wrote: Mon Feb 03, 2025 6:43 pm PS- Not that it matters, but you omitted your Trad 401k from your list of assets.
Strategic omission - just started the job + planning right now. Unfortunately I still haven't been able to contribute yet.





Also, an update - seems like my pre-tax, Roth, and after-tax 401k contributions are capped at 50%. My 401k plan documents indicate 50% for traditional/roth contributions, then a separate 50% for after-tax 401k contributions. Will give them a call and see if I can sort it out; otherwise, I'll just do brokerage.
GrumpyFarmer
Posts: 12
Joined: Mon Jan 20, 2025 5:12 pm

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by GrumpyFarmer »

OP, good day. I hope you are doing well.

Only other thing I would offer is this: I started investing in middle school (first mutual fund was 1987). Good thing was time was on my side. Bad news is I had no strategy. Good news is time was on my side. Bad news is I did not consider how/when to access future pots of money. Good news is time was on my side. Bad news is I can’t access the money without a penalty(at least not reasonably, sure there is 72T but do you want to draw it all down?). Good news is I invested based on philosophy of the funds and did not touch it. Bad news is I invested in good funds in the wrong accounts. Good news is time was on my side.

If I were to do over I would maybe buck some of conventional thought and I would come up with a withdrawal strategy first to decide my actual investing strategy. Consider how much you want to have available by some age, use conservative estimates and figure out how to get the money into those buckets. At your age I had no concept of that.

Grand Pop taught me how to squeeze the nickel till the buffalo took a crap (well that’s not what he said exactly but I bet Taylor L (thank you TL for your service) is old and wise enough to know what my grand pop said…he spent some time in Europe too and many many years later I spent some time in and around Ghent as well)… anyway what grand pop said is basically pinching a nickel to you (without getting the moderators involved).

Based on how you want to withdrawal, make the investing plan into the those buckets (order/priority of pre tax, taxable, after tax). I think the 3 fund strategy makes this a bit easier. Don’t over think it, KISS. But if want to stop working early (before 55) you have to be able to make a bridge until you have access to the funds or whatever the rules are for you situation. For me I have the funds but I am not willing to take a penalty. So I’d consider which buckets need which money to achieve your goal. I did not save enough into individual / taxable accounts and I had the wrong funds in those accounts (funds that are taxable and generating capitol gains and dividends). And by contrast where I have the sufficient funds those are in pre tax and Roth which there is also a penalty for access. If want to retire early you need the individual taxable accounts to make a bridge until you can get to the tax deferred and tax protected accounts.

Then you also have to understand what are the rules / policy of your 401k. In my case if I leave before 55, then I can not access, w/o 72t, until 59.5. If want to use 72t need to do the math to understand what it does and how much you have access to and how it works. Basically, the goal posts can move on you even if you have the funds…so now if I want to stop working before 55, I don’t need a bridge to 55 I need a bridge to 59.5. I can do that if I want to pay penalty or withdraw the wrong funds.

Read the rules and do the math. Dont listen to someone online. Read the rules and do the math.

You are doing great!
Save early and often (squeeze the buffalo)
Read the rules.
Do the math.
Rinse and repeat 🥃
fire_2030
Posts: 109
Joined: Sun May 17, 2020 5:53 pm

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by fire_2030 »

I really like the flexibility of the MBDR contributions being accessible in early retirement but im using it more as a backup. Turns out maxing two traditional 401K's for 20+ years each adds up quickly. Now the name of the game is 401K to rIRA conversions in early retirement so after the 5th year your really living off the converted t401k moneys and not any MBDR moneys. The funding in the first 5years can be done either with brokerage money or MBDR money as backup. If your saving this much already my guess is you will have some overflow and start filling up a brokerage account in additional to all these accounts in no time. Keep up the great savings rate! The MBDR really is a super powerful tool, especially if you can fill two of them!
Bubblewhale
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Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by Bubblewhale »

Navillus1968 wrote: Mon Feb 03, 2025 6:43 pm
AgonyInAustin wrote: Fri Jan 31, 2025 8:33 am Questions

1. Is it wise to contribute so much to a MBR at such a young age, are there any potential downsides? My expenses are very low, and my side-hustle income is sufficient for my wants/needs for now.
Taxable money is obviously more flexible than tax-advantaged money in terms of access prior to 59.5, but the tax-free growth in Roth trumps that advantage, IMHO. Bottom line, there's no real downside to using MBDR.

Additionally, MBDR contributions can be withdrawn before age 59.5 if you wait 5 years after the contribution.
There's really only a 5 year wait/10% penalty if there's any gains between the after-tax contributions and roth conversion. The after-tax contribution amount itself doesn't have a 5 year wait/10% penalty.

This shouldn't be a problem if you did an automatic in-plan roth conversion. If you do your in-service distributions immediately after after-tax hits 401K, there shouldn't be much gain. At most I'd encountered $30 in gains with 1 day market fluctuation, which isn't really much to pay 10% penalty on if I have to withdraw before 5 years are up. Keep in mind all of this follows Roth IRA withdraw ordering rules.

This would be the order if this was done before 5 years are up:
1. Roth IRA Contributions
2. After-Tax Contribution Gains/Pre-Conversion Earnings (10% Penalty)
3. After-Tax Contribution Amount
AgonyInAustin wrote: Wed Feb 05, 2025 4:20 pm
krafty81 wrote: Mon Feb 03, 2025 11:41 am Also, an update - seems like my pre-tax, Roth, and after-tax 401k contributions are capped at 50%. My 401k plan documents indicate 50% for traditional/roth contributions, then a separate 50% for after-tax 401k contributions. Will give them a call and see if I can sort it out; otherwise, I'll just do brokerage.
I'm a similar age to you and taking full advantage of MBDR via my 401K, and the only thing I'd cautious about with MBDR is with HCE compliance testing. After-Tax Contributions might be returned if it doesn't pass ACP testing while being a HCE. It's likely that your 401K plan set those contribution limits to ensure that it matches with ACP testing with non HCEs as well. If you're not an HCE then I wouldn't worry about this since there's no risk of contributions being returned.

I'd argue there's no downsides to do MBDR since the after-tax contributions can always be withdrawn. Just be weary on the whole process as there's potential gotchas such as that HCE compliance testing.

Applicable thread to read if you're a HCE.
viewtopic.php?t=239077
dink2win
Posts: 538
Joined: Tue Jan 15, 2019 5:53 pm

Re: Roth Mega Backdoor, Trad vs Roth 401k at age 22

Post by dink2win »

First of all, congrats on even knowing this stuff at 22. If I had known, I would be in a much better place now. Also kudos on keeping a simple lifestyle despite financial success, that will get you far in life.

I personally do Roth 401k, I think its great since tax rates right now are pretty low historically, and you are young meaning your tax bracket should only get higher as time goes on. Lock in the low taxes now and enjoy the tax free growth for decades. If your username is correct and you live in Texas (no state income tax) even more reason to do Roth, and you can avoid state income tax forever, like even if you move to a different state in retirement.

If you do not need your salary for expenses (due to your side gig) why not just do as much MBDR as much you can? If you quit the company you can roll it over to a Roth IRA and after 5 years, if you have an emergency you can withdraw the principal I believe. I wish I had access to a MBDR. Most companies do not, so this is actually a rare opportunity for you.

In the future if and when you turn 59, the Roth means you can withdraw as much as you want without worry of paying any taxes. Since you are so young the tax free compounding will be very nice. You don't need to worry about diversifying to traditional, as any company match you get will be pretax so you will have some diversity there.

The only suggestion is if you are truly planning on retiring early, you will want to build up your taxable brokerage to an amount that will sustain you until you can tap into the retirement accounts at 59. For example if you plan on retiring by 40, your taxable has to last you 19-20 years. So you should do that math, and then the rest just dump into the MBDR.

Stay full equities, even if you retire early, you can't tap into the retirement accounts until 59, so you can start diversifying to fixed income and bonds when you are in your 50s, if at all. Max growth at this point. Avoid target funds since you cannot withdraw at that date anyways. You're just throwing away money on the expense ratio. If you are 22 now, then you can't touch the retirement accounts until 2062 at the earliest.

Finally, if you decide to get married, pick a partner who shares your financial values and strategy. Nothing will derail your retirement plans than a shopaholic SO who is never content and always chasing the Jones. A partner who is same minded as you, works hard, saves and invests as much as possible, and has a simple lifestyle and wants will help you reach early retirement / wealth tremendously.
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