The 3 Types of Roth IRA Conversions

It’s been awhile since we’ve done a ‘deep dive’ article, so I thought it would be a good opportunity to unpack one of the best tax-saving tools: the Roth IRA conversion. Caitlin and I get asked about them all the time, and to be fair, the names don’t help.

Between "Backdoor" and "Mega Backdoor," it gives tax code meets spicy novel vibes. But don’t let the suggestive names fool you - these strategies are completely legal, IRS-approved, and have saved us tens of thousands in taxes over the years.

Most people don’t realize there are actually three distinct types of Roth conversions, each with their own rules, timelines, and tax consequences. So let’s demystify the Roth lingo and break down how these moves can seriously level up your tax game.

What is a regular ol’ Roth Conversion?

This is the process of rolling over money from a Traditional IRA to a Roth IRA. There is no limit on the rollover amount and no income restrictions on who can complete the conversion, but the funds are TAXED at the time of the conversion. The contributions can be withdrawn penalty-free after 5 years.

Who is this for?

• High-income earners who cannot typically contribute to a Roth IRA

• Someone in an abnormally low tax bracket (due to job loss, sabbatical, business losses, etc.)

• Someone looking to retire early who will need access to their retirement funds earlier than the typical retirement age.

  
  

How it works:

1. (Optional) Roll over an old 401k account to a Traditional IRA

2. Open a Roth IRA account

3. Roll some amount of money from a Traditional IRA account to the Roth IRA account

4. Invest the Roth IRA money into funds/stocks/bonds of your choosing

5. (If needed) Make an estimated tax payment before the end of the year to cover the conversion

   
   

What are the benefits?

• Can potentially pay a lower tax rate on retirement savings

• The Roth IRA now grows tax-free forever

• Earlier access to retirement contributions

• No Required Minimum Distributions (RMDs) in retirement

  
  

Example:

Ella leaves her current job and takes a year-long sabbatical to travel and work on some side projects. Her income during this year is unusually low compared to her usual tax bracket.

Because Ella has left her job, she rolls her previous 401k into a Traditional IRA. This is all pre-tax money, so she has never paid any taxes on the contributions or the growth. Ella’s income is normally too high to contribute directly to a Roth IRA.

Since she has no income this year, Ella decides to complete a Backdoor Roth IRA Conversion – she opens a Roth IRA and rolls $24,850 from her Traditional IRA into this Roth IRA. Income taxes are now due on the $24,850, but since that is the only income Ella has this year, after the standard deduction of $13,850, Ella only owes 10% tax on the remaining $11,000, for a tax bill of $1100, and a total net tax rate of 4.4% on that $24,850.

Ella was able to deposit that money in her 401k tax free, move it to a Roth IRA at only a 4.4% tax rate, and now it will continue to grow forever tax free. She can also withdraw that $24,850 contribution in 5 years without penalty!

What is a Backdoor Roth IRA Conversion?

Another popular type of Roth Conversion is the "Backdoor" Roth IRA Conversion.

Who is this for?

This is for high-income earners who don't qualify to contribute directly to a Roth IRA and thus have to contribute after-tax (rather than pre-tax) dollars to a traditional IRA (due to having a workplace 401k and a high income).

The Backdoor Roth IRA Conversion gives you a path to land those after-tax dollars in a Roth IRA (growing tax-free) rather than keeping them in the Traditional IRA (future taxes due on the growth).

How it works:

1. Deposit after-tax dollars in your Traditional IRA

   • Try not to mix pre-tax and post-tax dollars in your IRA, as this move can get messy and trigger more taxes because of the IRS “pro-rata rule”.

2. Wait at least 30 days, and roll those funds into a Roth IRA within the same calendar year

   
   

That money now grows tax-free, and you’ve just snuck into the Roth club through the backdoor!

The big difference between these two types of conversions is that a regular Roth Conversion typically involves pre-tax money (either rolled from a 401k or already in a Traditional IRA), while a Backdoor Roth Conversion typically involves after-tax dollars.

What is a Mega Backdoor Roth Conversion? (this is sounding dirtier and dirtier, but it’s really not! 🤣)

Ready to take your Roth game to the next level? Enter the Mega Backdoor Roth Conversion – a strategy that lets you potentially move up to $70,000 (for 2025) into a Roth IRA or Roth 401k in a single year. This is a completely different strategy from the regular Backdoor Roth conversion.

But here's the catch: this strategy only works if your employer’s 401k plan allows both after-tax contributions and in-service withdrawals or in-plan Roth conversions - so it’s not available to everyone.

Who is this for?

This strategy is ideal for high earners with access to a 401k plan that allows both:

1. After-tax contributions (not Roth contributions - this is different!)

2. In-service withdrawals or in-plan Roth conversions

If your plan checks both boxes, you’re golden.

How it works:

1. Max out your regular 401k contributions

2. Then contribute additional after-tax dollars to your 401k, up to the overall IRS limit ($70,000 total in 2025, including employer match and regular contributions)

3. Roll the after-tax portion either:

· Into a Roth IRA (via in-service distribution), or

· Into your plan’s Roth 401k (via in-plan conversion)

The money moves from taxable space to tax-free space - without being subject to the pro-rata rule like with traditional IRAs.

Why it’s a big deal:

The Mega Backdoor Roth lets you fast-track serious dollars into Roth territory. That means more tax-free growth, no RMDs, and a bigger pile of money working for your future self.

If your 401k plan allows these, don't sleep on this strategy. It’s one of the most powerful tax planning tools out there for high-income savers who want to build long-term, tax-free wealth.

Whether you’re using the backdoor or doing a regular Roth conversion, the goal’s the same - more money growing tax-free for the long haul. It’s all about playing smart with your tax strategy now so 'future-you' has way more freedom later.

Want to incorporate Roth conversions into your wealth and tax plan? Check out our self-paced Wealth by Design course to learn how!