Should I Be Prioritizing the Mega Backdoor Roth?

Added: 2026-05-27

[00:00:00][music] >> Welcome to the Jill on Money show. It's Wednesday, May 27th. Do I love a holiday shortened week? Just 4 days and then you're on your way gang. So essentially this is like even better than hump day cuz you didn't work on Monday, most of you at least. And if you did work, sorry about that. I take every possible day that I can. So any day the stock market is closed, that's a day I don't work.

[00:00:26]Thank you. Thank you. It's It's a one of the tricks of the trade.

[00:00:29]Hey gang, are you thinking about something going on in your financial life? Is there an issue that has cropped up that you need a maybe another set of ears and eyes on the situation? Why not get in touch with us? Just go to jillonmoney.com and in the upper right hand corner there is a contact us button. When you click that button a form will pop up. If you're going to write us an email, don't forget to give us a lot of information.

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[00:01:08]If you are going to join us on the program, you don't have to be quite as detailed. Just check the box, mark will follow up and do everything else. While you're on the website, don't forget to subscribe to the free weekly newsletter comes out on Fridays and we love that newsletter. That is a great way to keep in touch with us and track what's going on. As I've been talking about gang, our Money Watch show is going to be morphing into a new show. It's called Money Moves and there's going to be, yes, wait for it, video. So it's going to be a lot of fun. Make sure you subscribe to Money Watch right now so you don't miss the beginning of this program. We'll tell you when it is live on YouTube and it'll be so much fun. Check that out. Okay, today we are joined by Mary from the Bay Area. Hello Mary, how are you? It's early for you. We're talking to you.

[00:01:58]It's a 8:00 in the morning for you, 11:00 here on the East Coast. So, thanks for joining us. Thanks for having me.

[00:02:05]What's going on? How can we help you out? Yeah, I just have some questions, um about mega backdoor Roth versus investing in brokerage. Um I also have a lot of RSUs vesting this year, so I'd like to dig into that. All right. I love this is a Mark, this is what we'd like to call just these are like the code words for Mary's got money. How about that? We maybe should call that episode Mary's got money, what should she do? Um first and foremost, Mark, get ready. I'm ready for you Are you ready to explain the mega backdoor Roth to the folks listening there before we get into Mary's whole story. Do you Are you ready to do that for me?

[00:02:44]Talking to me? Yeah, you.

[00:02:47]It's nice that her company offers it cuz not all companies do. Yeah. So, explain what it is.

[00:02:53]It's basically just a mechanism that some companies will allow employ employees to contribute additional post-tax dollars to their retirement plans at work. So, you can go way above and beyond the the usual I think it's 24,500 this year. And so, what's cool about it is that if you can afford it, it's a way to shovel in even more money into the Roth environment. So, um so, we're going to get to Mary, to your situation. First of all, how old are you? I'm 39. Young and bright-eyed and bushy-tailed, fantastic. What is your status? Partner, married, single, what you got? Uh partner, but everything is completely separate. Kids or no kids? No kids. Okay. Plan for kids or no kids?

[00:03:41]What do you think?

[00:03:42]>> No kids. Yeah, no kids. Animals or not?

[00:03:45]Nope. What? I got nothing. All right.

[00:03:48]You got You got You got a partner.

[00:03:49]That's fine. Don't worry.

[00:03:51]Um okay. So, Mary, how much do you earn right now?

[00:03:55]So my base is 235 and then the RSUs that I have vesting this year by end of year will be 175.

[00:04:05]Okay, so those are the RSUs that are vesting and the taxation of those restricted stock units if you were to sell them let's say they all vested tomorrow and you sold everything available. What is the tax liability? I guess this is a question for you because historically I have held on to them for a year and then sold them and then put them in like a Vanguard index fund but another option is to just sell them day of or whatever and then put them in the index fund just different taxation. So you would be so what in in your way it's like they become available. You wait a year because the day they become available. That's your cost basis, but if you wait a year, you would be subject to capital gains long-term capital gains rate, but if you needed the money and you or you were like a little freaked out like oh, I don't want to wait or something's going on with the company or you just maybe you just needed the money because you were say buying a house. If you then sold it immediately, you would be subject to short-term capital gains which would be a higher rate for you.

[00:05:17]Okay, so that's really the difference.

[00:05:19]So I understand the waiting and it's worked out well for you theoretically. I'm just wondering like how that has it sounds like it probably has yes. Yeah, I've never needed the money and so typically I just let it sit there for the year and then once the year hits I sell it and then put it into a Vanguard fund. Okay, great. All right, so let's talk about maybe you can do that again. I mean obviously there's some risk, right? Like the stock goes down and you're like oh god damn it. why didn't I sell that? Right? You look back, oh I should have sold it, but you know, whatever with the benefit of hindsight. Yeah. So, right now, let's talk about how much is in that brokerage account. Uh 875. Wow, you're so young, you got a ton of money, it's amazing.

[00:06:04]Yeah. And what about retirement savings?

[00:06:07]Uh I have 560 in my 401k. Mhm, and that's traditional or Roth? Traditional.

[00:06:14]Okay. And any Roth money? I have 145 in my Roth IRA, no traditional Roth. And and when you came came on and you said about the mega backdoor Roth, do you have the cash flow to be able to absorb doing a mega backdoor Roth?

[00:06:30]I can, so historically whenever I've had a couple thousand extra dollars, I'll just dump it into my brokerage, but instead I could stop doing that and then just calculate whatever percentage I I want to >> Right. and then funnel it in that way. I just I've never done it for no particular reason. Right.

[00:06:49][clears throat] It's because it's like a tiny bit complicated. Like the brokerage account is pretty easy. Yeah. Is there any reason you need money from that brokerage account? Do you own a home or do you and your partner own a home or do one of you own a home or do you want to own a home? I don't own a home and I don't want to own a home. Wow, tell me why? It's like the opposite of what everybody says. What How do you know so much about yourself? Tell me why. Um I love having one payment that I know of every month and I pay it, nothing more, nothing less. I hate maintenance. I don't want to deal with anything and I watched my parents deal with just all sorts of home ownership and property management stuff and I just want nothing to do with it.

[00:07:29]>> I think that is hysterical. It's like It's like you you I want you to be the poster child for why renting makes sense. Running the numbers, it it actually makes more sense for me to rent than to buy, especially where I live.

[00:07:41]Yeah, I mean even though you live in a high cost of living area where not just housing costs a lot, but rent is expensive, right? It is. I I'm afraid to tell you what I pay.

[00:07:51]>> it's okay. Um for a one-bedroom, it's about 4,000.

[00:07:56]That doesn't We're from New York.

[00:07:57]>> You're from New York, that's why I didn't >> You know, I mean, so don't worry. We're we're we're we're very much uh you know, adapted [clears throat] to that. I think Yeah. Mark, I don't know if you saw this, but I think that the like the median rent in Manhattan is four or five thousand now. It's So, that's incredible. Especially in in a place like New York, where we have a lot of housing stock that's cheap. We have a lot of assistance by the city and the government. So, we actually have some low-cost options. I mean, it's not as much as everybody wants, but we have rent-stabilized buildings. We have rent-controlled build-buildings. So, that just means that like everyone else is paying a lot more. Yeah.

[00:08:33]>> So, okay. So, we're thinking like maybe a couple thousand bucks a month that is available for the mega backdoor. But, I'm I'm not going to say you have to.

[00:08:42]I'm just saying that would be the availability. Mhm.

[00:08:45]>> And right now, are you maxing out your retirement account? Yeah, so I max out the 401k. I do the backdoor Roth, and then I max out the HSA as well.

[00:08:58]How much is in the HSA? 85.

[00:09:01]Great. Your 401 The 401k is pre-tax or Roth? Yeah, the the for the traditional 401k is is 560. Yeah. She's got a the back her Roth, which is through the back door, is 145. And then the question is whether, you know, she's got 875 in brokerage, which is incredibly You First of all, like may Let me take a breath.

[00:09:21]You're doing an incredible job, Mary.

[00:09:23]Absolutely incredible, amazing, amazing, okay? And I think because you have so much money in brokerage, I am inclined for you to do the mega backdoor. I really am.

[00:09:34]Could you shift to in terms of a your just plain old 401k, is there any reason not to use the Roth the 401k Roth option?

[00:09:48]Not necessarily.

[00:09:50]I mean, I guess in order it's funny because you have the mega backdoor. I guess Mark there is a a case to be made that Mary is in a high tax bracket because she's got you know that 235 grand of base plus she gets these RSUs so there's some tax there's tax on top of that. She lives in California high tax state. So there is a possibility that she like finds herself in the you know maybe I'm not saying always but maybe in the 35% bracket probably sometimes.

[00:10:24]Could she use the pre-tax for traditional then put in a bunch of extra money into the mega backdoor? Would you be game down for that or do you want her to use the Roth no matter what?

[00:10:37]Uh yeah no she should be using Roth in my opinion for sure. She's so young she already has a nice chunk saved pre-tax.

[00:10:42]She should be all in on the Roth. I I would make that switch first. I would make all of your regular 401k contributions Roth. Mhm. See how it impacts the paycheck, see what you're left with on a monthly basis after the fact and then if you still are left with you know a couple of grand each month then that's when you would make the move into doing the backdoor the mega backdoor Roth.

[00:11:03]>> you split it between traditional and Roth for your contributions?

[00:11:08]I'm sure she can. Oh is that question for me?

[00:11:10]>> for you. Yeah for you. In other words if you didn't want to go so like it's almost like going to cold turkey.

[00:11:16]Instead of doing that I you're maxing out your traditional right now. So let's just say that you said all right right now I'm putting I'm going to make up the percentage 15 18% is going into traditional. Maybe you would do it just to get used to the cash flow implication. Maybe what you would do is you'd say, "All right, I'm going to go 10 and 10 and eight." Or and then slowly but surely get yourself to all Roth, see how it feels, and then the the mega backdoor would be interesting only if your cash flow feels comfortable enough to absorb it. Okay. Yeah, that's it.

[00:11:51]>> Right?

[00:11:52]And you have a ton of money in brokerage anyway.

[00:11:55]Especially if those RSUs are coming, you know, fast and furiously. Um do you get nervous about waiting the year or not?

[00:12:03]No. Okay. If you're not nervous, I'm not nervous. You work for a company, it sounds like you're had a good experience. Gang, a lot of people who are in that situation, um they don't want to chance it. So, um when you have those restricted stock units that become available, the reason to sell it immediately is that you're kind of either you need the money, so that's number one, but because Mary has all this money in brokerage, it's really not like you need the money. The risk is the stock goes down in that year, you missed your opportunity, and maybe you either hang on or maybe you say, "All right, well, you know, I'll wait even longer." But that's the risk. The risk is the actual the company's value drops, and you've missed an opportunity. But the upside is you pay at a long-term capital gain rate. And you know, again, we're talking about for you in the 30-something tax bracket for your money or maybe 35, and you know, as you make more and more money versus the top bracket that you could potentially be paying as a single is probably you're probably at 18.8 is probably where you are for the long-term capital gains. You're not I mean, if you make If you're making a million dollars a year, it'll be more, but like for now, 18.8 is like half of what you would pay for your short-term.

[00:13:26]So, it makes sense to me to take on that risk, especially because you don't need the money. If you knew you needed the money, I'm buying a house, I'm doing this, I'm going to grad school, whatever it is, then you're just going to pay it.

[00:13:37]So, um Mary's got money, and Mary, you're doing a great job. You're awesome. And are you managing everything yourself?

[00:13:46]Yeah, I feel comfortable managing everything myself. Maybe once every couple years I'll meet with a fee-based financial advisor and just run things by them, but otherwise >> Who's going to inherit all of your money?

[00:14:00]Um part family and part charities, which is actually another question I had.

[00:14:05]>> Tell me more.

[00:14:06]Yeah, so in my living will I have a portion allocated a large portion actually allocated to charities.

[00:14:14]And right now what I do is I I just I don't know, I kind of spend some money, you know, buying food, buying clothes, whatever, and donate it.

[00:14:21]But I'm wondering if I should be looking into like a donor advised fund and Okay, I I have the best idea. I'm so excited right now. Okay, so you know that 175 that you have in your RSUs? Yeah. Okay, so let's say I'm talking to you where it's the end of May. Let's say you you're this money is live available for you invested on June 1st. Mhm. Okay, just pretend.

[00:14:44]And let's say that you determine that at least for now, while you're making a a chunk of money, you would really like to get your charitable giving um pre-funded. Meaning, you want to put money into an account that doesn't have to be given away all at once, but that you want it while you have these RSUs, while you have this income, you want to build yourself a little like it's it's like the mini Mary foundation, okay?

[00:15:16]Here's how it would work. So, again, let's pretend your 175 of RSUs, it's now your money. It's the stock. It's the company. It's publicly traded, right?

[00:15:27]Mhm. Okay. Now, on June 1st, it's in your power to sell it, but if you sold it, what would happen? You'd get whacked with taxes. We've already talked about that. Let's say you were set you said uh "Hey, I'm going to take instead of I'll I'll I'll go Let's just for argument's sake pretend that you just want to put it all away at once." You could take that 175 of stock. It can be moved into a donor-advised fund in one fell swoop.

[00:15:57]For this tax year, you would be getting a deduction for the whole $175,000 that went into the donor-advised fund.

[00:16:06]So, it is a massive tax write-off for you, okay?

[00:16:10]The second order effect is when you gift it into a donor-advised fund, it you don't have to pay capital gains on it.

[00:16:19]It goes in as a charitable contribution.

[00:16:21]The money that goes into the donor-advised fund doesn't go in as stock, actually. It's sort of like a a a two-step mechanism where it kind of you say I'm giving the stock of my company.

[00:16:31]I'm gifting it into my own donor-advised fund. It comes in as cash. You can take the 175 that comes in cash. You can keep some portion of it in cash to give away, and you can invest the rest. So, you could literally create your own little mini fund to give away to charity. Now, it it is not the same thing as buying food or clothes. It doesn't have that grassroots effect. But, what you could do, Mary, is you could say every year you could say I'm going to give 10 or 20 thousand dollars away to organizations I care about. You do it directly from the donor-advised fund. You don't get the tax deduction when you give the money from your donor-advised fund. You've gotten it on the way in, okay?

[00:17:17]You could do this. You could do this every year. You again, you don't have to do the whole 175. You could take 50 a year and do that. That so that by the time you're 45 years old, you've got a hundreds of thousands of dollars that you can use to give away. If something were to happen to you and in instead of having like the a charities listed in the living will, all you would have in the living will is so and so who is, you know, the executor is the person who will make a decision about my donor advised fund, whatever cash is left in that account. This could be an incredibly powerful tool for you while you're making a lot of money.

[00:17:56]And it does so many things at once. It's sort of like the the most um efficient way to have a slug of money and this way when, you know, your annoying friend Jill is saying I'm doing a bike ride for charity, you can just use your donor advised fund to give money to that. If you're invited to do something, if you're in an if you're like just really into an organization and you say I want to give a significant amount of money away over the course of time, you can make that happen. It's amazing. So, the fact that you are charitably inclined, I usually don't have the donor advised fund conversation with people who are 39, but since you said you're charitable, it's a no-brainer. Where are you managing your money? What's Where's the brokerage account? Uh Vanguard.

[00:18:41]Vanguard has a donor advised fund. You can do it directly at Vanguard. Okay.

[00:18:45]Okay. Yeah, that makes sense. I I just wanted to cuz I know I'm going to be giving a lot of money away and right now it's pretty much after I die and so I didn't >> So much more fun to do it while you're alive. That's true. Yeah, that's Right?

[00:18:58]You know, and it's like you can get involved in organizations, you can research the organizations.

[00:19:04]You can really have a hand in this. I think it's amazing. I'm excited for you, Mary. This is fun. And you're real and it's a smart tax decision. By the way, all the money in the donor advised fund, even if it's invested and makes money, there's no tax implication.

[00:19:20]Okay.

[00:19:20]>> So, it's it's a great way to get that money that is now, you know, again, it was part of your compensation.

[00:19:27]Restricted stock units and options and the the the you know, the the these are the successor to options. This is all money that you would have had in, you know, in salary, but it's coming in stock. It's just that you are able to escape taxation because you're using a charitable organization to help you. And it's so great. So, if you run into any problems or any other questions, you you know, let us know, but I'm excited for you. Congratulations. You've done an incredible incredible job of amassing this, and I mean, really may come back and talk to you about um could you possibly come on our other show and talk about why renting makes sense? Yeah.

[00:20:04]>> I try to convince people all the time.

[00:20:06]They don't believe me. No, I'm very passionate about renting, so ah. So, you see, you might come on camera for that.

[00:20:12]What blur Yeah, we'll blur you out or something. We'll For you're trying to figure it out and right now. Um thank you so much. Hey gang, if you receive compensation in the form of stock units or uh something that's a little bit different, this is the kind of conversation you can have. How can I best use this? How can I fund different uh opportunities? How can I be charitable? All these things, they are available to you. All you need to do is get in touch with us. Go to jillonmoney.com, click the contact us button, write us a note, let us know what's going on. If you want [music] to come on the program live, check the box marked, we'll do everything else. You can subscribe to us on the Odyssey app or wherever you find your favorite [music] podcast. Try to do something nice for someone else today.

[00:20:59]Change your work, change your wealth, change your life. Thank you for listening, and we'll talk to you tomorrow.

[00:21:06]>> [music] >> Hey.