Broker Check

Maximize Your Retirement Savings with the Mega Backdoor Roth Strategy

June 05, 2024

Introduction

The Mega Backdoor Roth has emerged as a popular strategy for high-income earners to save more for retirement. This article will explore what a Mega Backdoor Roth is, how it works, and who might be the ideal candidates to utilize this strategy.

What is a Mega Backdoor Roth?

A Mega Backdoor Roth is a retirement savings strategy that allows high-income earners to contribute after-tax dollars to a Roth IRA or Roth 401(k). This strategy is particularly useful for individuals who are ineligible to contribute to a Roth IRA due to income limits. The Mega Backdoor Roth can be a powerful tool for those looking to maximize their tax-advantaged retirement savings.

How Does the Mega Backdoor Roth Work?

The Mega Backdoor Roth strategy involves two main steps:

Making after-tax contributions to a 401(k) or other workplace retirement plan. The limit for contributions to 401(k) plans in 2024 is $69,000. This includes contributions for both pre-tax and after-tax contributions.

Converting those contributions to a Roth IRA or Roth 401(k).1

The process allows high-income earners to bypass the income limits that typically prevent direct contributions to a Roth IRA.

Who Are the Ideal Candidates for a Mega Backdoor Roth?

Ideal candidates for a Mega Backdoor Roth strategy are high-income earners who have already maxed out their traditional 401(k) and IRA contributions and are looking for additional ways to save for retirement. Here are some specific criteria that make individuals more likely to benefit from this strategy:

High-income earners: Individuals earning more than the Roth IRA income limits ($161,000 for single filers and $240,000 for married filing jointly in 2024) are ideal candidates for a Mega Backdoor Roth.

Maxed-out contributions: Those who have already contributed the maximum amount to their traditional 401(k) and IRA accounts and are looking for additional tax-advantaged savings opportunities.

Access to a compatible 401(k) plan: The individual's workplace retirement plan must allow after-tax contributions and in-service withdrawals or in-plan conversions to a Roth 401(k).

Long-term investment horizon: The Mega Backdoor Roth is most beneficial for individuals with a long-term investment horizon, as the tax-free growth and withdrawals in retirement can be significant.

Tax planning considerations: High-income earners who expect their tax rate to be higher in retirement than it is currently may find the Mega Backdoor Roth to be an attractive option, as Roth accounts provide tax-free growth and withdrawals.

Conclusion

The Mega Backdoor Roth is a powerful financial planning strategy that can help high-income earners maximize their tax-advantaged retirement savings. By making after-tax contributions to their 401(k) and then converting those funds to a Roth IRA or Roth 401(k), individuals can bypass income limits and build a substantial nest egg for their future. If you're a high-income earner looking to optimize your retirement savings, the Mega Backdoor Roth may be worth considering.


1Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.