Unlocking Your Retirement: Mega Backdoor Roth Strategy

What is a Roth IRA? What is a Roth 401k? Do I make too much money to qualify? What about backdoor vs. mega backdoor? If you’ve asked yourself any of these questions, keep reading!

First some background: A regular IRA and a regular 401k both give savers the opportunity to put aside a portion of their income to save towards retirement, and enjoy a tax break on the contribution, and a deferral on the taxes from the growth in the account.  Upon retirement, you pay income taxes as your withdraw the money.  Roth IRAs and Roth 401k accounts do not give you the upfront tax deduction, but your growth and withdrawals in retirement are tax-free.

High earners aren’t able to directly contribute to Roth IRAs (there are no income limits for Roth 401k contributions) and so there’s a way to convert a regular IRA to a Roth, which is known as a “backdoor” Roth IRA.  However, there’s still a limit for how much you can contribute to a Roth IRA in a given year – for 2024 that’s $7000 (or $8000 if you’re over 50). 

The Mega Backdoor Roth

Now that we have the background of the “Backdoor” Roth, what exactly is the “Mega Backdoor Roth”?  The Mega Backdoor Roth is a way to contribute to your 401k with after-tax dollars, and then either withdraw it to convert to a Roth IRA, or convert within the plan if there is a Roth 401k available.

How Much Can I Convert with the Mega Backdoor Roth?

In 2024, the IRS allows you and your employer to put up to a total of $69,000 into your 401k ($76,500 if you’re over 50).  Your regular employee contributions max out at $23,000 ($30,500 if you’re over 50), which leaves you with an extra $46,000 of after-tax contributions.  If you receive a company match, you must deduct that from the $46,000. For example, if you max out your 401k by contributing $23,000 and your employer contributes $11,500, then you would be able to contribute another $34,500 using the Mega Backdoor Roth strategy.

Is My 401k Compatible with the Mega Backdoor Roth?

Your 401k plan must offer two key features for you to take advantage of the Mega Backdoor Roth strategy. 

  1. After-tax contributions.  This is separate from your regular 401k contribution, and are kept in a separate bucket.
  2. In-service withdrawals. Your 401k plan must allow you to either withdraw the money while you are still employed so that you can move it to a Roth IRA, or your plan must allow you to move the money to the Roth 401k part of the plan.

If you’re not sure whether your plan has these two elements, reach out to your HR department or your financial advisor.

Is the Mega Backdoor Roth Right for Me?

Generally, if you are pursuing the Mega Backdoor Roth, you should have lots of excess savings.  You should already have maxed out your regular 401k, maxed out your HAS (if you have one), have a comfortable emergency fund and have plenty of savings for your needs prior to retirement.  If you have all of that and more, then this strategy may be for you. 

Before you implement this strategy, be sure to reach out to your financial advisor or CPA and discuss your individual circumstances.  This can be a great way to build a pot of tax-free savings to help fund your retirement.