This is an honest-to-goodness note to my future self.

Backdoor Roth IRA

Definition: Converting pre-tax 401k and/or IRA money to post-tax Roth IRA money.

Mechanics: Create a rollover IRA account, if you don’t have one. Have the 401k money transferred or distributed to this rollover IRA account. Then convert the rollover IRA money to the Roth IRA. Taxes will have to be paid, and they can’t be paid out of the conversion money, or out of the Roth IRA itself.

When it can be done: After you’ve separated from an employer, or when you’re 59.5 years old.

Mega-backdoor Roth IRA

Definition: Converting post-tax 401k and/or IRA money to post-tax Roth IRA money.

Mechanics: Create a rollover IRA account if one doesn’t exist already. Roll the post-tax money from the 401k to the Roth IRA. This is not a taxable event, because tax has already been paid.

When it can be done: Whenever you want, because it’s post-tax money.

Notes: The IRS allows individuals to contribute some amount of pre-tax money to a 401k, however individuals may contribute more than this limit, up to a second, higher limit. Anything over the first, pre-tax limit has income tax taken out when it’s deposited. It is this post-tax portion that is eligible to go through the mega-backdoor conversion process.