What is a Mega Backdoor Roth?
Learn about the Mega Backdoor Roth strategy, how it works, and how it can help maximize retirement savings by converting after-tax contributions to a Roth IRA.
A Mega Backdoor Roth is a strategy that allows individuals to contribute more to a Roth IRA than the standard contribution limits permit. It works by making after-tax contributions to a 401(k) plan and then converting those contributions into a Roth IRA or Roth 401(k). This strategy allows high-income earners to bypass the typical Roth IRA contribution limits, which are income-based.
How the Mega Backdoor Roth Works
The strategy leverages the fact that many 401(k) plans allow after-tax contributions, in addition to pre-tax or Roth contributions. Here’s how it works:
Maximize Pre-Tax or Roth 401(k) Contributions: You begin by contributing the maximum allowed to your 401(k) through pre-tax or Roth contributions. For 2025, the limit for these contributions is $22,500 ($30,000 if over age 50).
Make After-Tax Contributions: Next, you can contribute additional after-tax dollars up to the overall 401(k) contribution limit, which is $66,000 ($73,500 for those over 50 in 2025). This total includes both employee and employer contributions.
Convert After-Tax Contributions to Roth: After making the after-tax contributions, you can convert them to a Roth IRA or Roth 401(k) via an in-plan Roth conversion or by rolling them over to a Roth IRA. This step is key to enabling the Mega Backdoor Roth strategy.
Benefits of the Mega Backdoor Roth
The Mega Backdoor Roth offers several advantages for those who are eligible:
- Higher Contribution Limits: It allows for significantly higher contributions to a Roth account than the standard Roth IRA limits.
- Tax-Free Growth: Once in the Roth IRA or Roth 401(k), the funds can grow tax-free, and qualified distributions are also tax-free.
- Bigger Retirement Savings: This strategy can substantially increase retirement savings, especially for high-income earners who are typically phased out of contributing directly to a Roth IRA due to income limits.
Eligibility and Considerations
Not all 401(k) plans offer the option for after-tax contributions or in-service conversions, so it’s important to confirm whether your plan allows these features. Additionally, the strategy involves more complex paperwork and conversions, so be sure your employer’s plan can facilitate it.
Before using the Mega Backdoor Roth, consider the potential tax implications. Any earnings on after-tax contributions may be subject to tax if not converted quickly, making the timing of the conversion crucial.
Example:
If you are under 50, you can contribute up to $22,500 to your 401(k) in pre-tax or Roth contributions. After that, if your plan allows, you could contribute an additional $43,500 in after-tax dollars, bringing the total 401(k) contribution to $66,000. After making those after-tax contributions, you can convert the entire $43,500 to a Roth IRA or Roth 401(k) using an in-plan conversion or rollover. This allows you to bypass the Roth IRA contribution limits, significantly increasing your tax-advantaged retirement savings.
ProjectionLab can help you model the impact of a Mega Backdoor Roth on your retirement strategy and evaluate whether it’s the right choice for your financial goals. Start planning today!
