9. Mega Backdoor Roth

The Mega Backdoor Roth is a strategy that allows high earners to contribute additional after-tax dollars to their 401(k) and convert them into a Roth IRA, bypassing income limits for direct Roth IRA contributions.

Advantages of Mega Backdoor Roth

• Tax-Free Growth: Contributions grow tax-free, and withdrawals in retirement are also tax-free.
• High Contribution Limits: You can contribute up to the overall 401(k) limit ($66,000 in 2023, including employer contributions) minus your pre-tax and Roth 401(k) contributions.
• No Income Limits: Unlike direct Roth IRA contributions, there are no income restrictions for the Mega Backdoor Roth.

Eligibility for Mega Backdoor Roth

To use the Mega Backdoor Roth, your 401(k) plan must allow:

• After-Tax Contributions: Not all plans permit after-tax contributions beyond the standard pre-tax or Roth 401(k) limits.
• In-Service Distributions or Conversions: Your plan must allow you to convert after-tax contributions to a Roth IRA or Roth 401(k) while still employed.

Example

Assume:

• You contribute the maximum $23,500 to your pre-tax 401(k), and $70,000 for the combined employee and employer contributions.
• Your employer contributes $10,000.
• You contribute an additional $36,500 in after-tax dollars to your 401(k).
• You convert the after-tax contributions to a Roth IRA.

This allows you to effectively contribute $70,000 annually to your retirement savings, with the after-tax portion growing tax-free in the Roth IRA in 2025.

Steps to Implement the Mega Backdoor Roth

• Check Plan Rules: Confirm your 401(k) plan allows after-tax contributions and in-service distributions or conversions.
• Contribute After-Tax Dollars: Maximize after-tax contributions up to the overall 401(k) limit.
• Convert to Roth IRA: Convert after-tax contributions to a Roth IRA or Roth 401(k) as soon as possible to minimize taxes on earnings.