The Mega Backdoor Roth to Create After-Tax Wealth
Summary: Benefits of the Mega Backdoor Roth Strategy
- Maximized After-Tax Savings: Allows high-income earners to contribute beyond standard 401(k) limits, leveraging after-tax contributions for greater retirement savings.
- Tax-Free Growth Potential: Converts after-tax contributions into a Roth account, enabling future investment gains to grow tax-free.
- Strategic Advantage for High Earners: Unlocks additional retirement savings opportunities, especially valuable for those facing contribution limit constraints under traditional plans.
What is the Mega Backdoor Roth?
At a high level, the Mega Backdoor Roth strategy allows plan participants to:
Make after-tax contributions to a 401(k), beyond the elective deferral limit
Convert those after-tax contributions to a Roth account, either within the plan or through an in-service withdrawal
There are two annual contribution limits to know:
Employee elective salary deferrals, including catch-up contributions
Overall contributions
The table below outlines these limits for different age groups.
| Age group | Salary deferral limit | Catch-up contribution | Overall contribution limit |
|---|---|---|---|
| Under 50 | $23,500 | NA | $70,000 |
| 50–59, 64+ | $23,500 | $7,500 | $77,500 |
| 60–63 | $23,500 | $11,250 | $81,250 |
Most people are familiar with the salary deferral limit. In our experience, fewer realize the overall contribution limit is significantly higher.
Why It’s So Powerful
Roth IRAs can offer tax-free retirement income and access to contributions, penalty-free and tax-free, for any reason. These are two big reasons investors love Roth IRAs.
The problem? High income individuals and families are often phased out of Roth IRA eligibility, which could force retirement savings toward pre-tax retirement accounts. Generally, this can be a positive if high income families expect income in retirement – and income tax – to be much lower than during these high earning working years.
A potential negative? Large pre-tax retirement accounts can have big required minimum distributions (RMDs) and a big tax burden later in retirement.
A Mega Backdoor Roth could help savers:
✅ Create a source of tax-free retirement income
✅ Reduce future RMDs (taxed as ordinary income)
✅ Protect against unknown future tax rates
✅ Add flexibility to retirement planning
How is This Different Than the Backdoor Roth IRA?
High income families may already be familiar with the backdoor Roth IRA concept, which is typically used by families whose income is too high to make normal Roth IRA contributions. It involves making non-deductible contributions to a traditional IRA and then converting those assets to a Roth IRA. When done properly, it can be a powerful way to create after-tax retirement savings.
It can be easy to confuse the Backdoor Roth IRA with the Mega Backdoor Roth. The table below outlines a few of the similarities and differences.
| Feature | Backdoor Roth IRA | Mega Backdoor Roth |
|---|---|---|
| Account type | IRA | 401(k) |
| Type of conversion | Traditional IRA to Roth IRA | After-tax 401(k) to Roth 401(k) |
| Annual contribution limit (under 50) | $7,000 | $69,000 |
| Requires plan with specific features? | No – available to anyone with earned income | Yes – see below |
| Income limitations | No | No |
| Subject to pro rata rules | Yes – click here to read more. | No |
| Typical use case | High earners phased out of Roth IRA eligibility with little or no traditional IRA assets | High earners maxing out 401(k) elective deferrals with a desire to save even more |
While the Backdoor Roth IRA may be a great way to fund a Roth IRA when your income is high, the Mega Backdoor Roth might be best for maximizing tax-free contributions within a 401(k) – potentially 5x more than the Backdoor Roth IRA strategy.
Can Anyone Do This?
No. Look for the following to see if the Mega Backdoor Roth is an option.
Your plan allows for after-tax contributions
Your plan allows for in-plan Roth conversions or in-service distributions
Finally, there is the issue of cash flow. Money saved is money not spent. If your plan has an after-tax component, a means to convert those after-tax contributions to Roth, and you have the financial ability (and desire) to save beyond the elective salary deferral limit, the Mega Backdoor Roth could be an option worth serious consideration.
Case Study: Employee with Employer Match
The employee in this scenario is 45 years old and participates in a 401(k) plan that offers pre-tax, Roth, and after-tax contribution options. In-plan Roth conversions are available. The employee maximizes their elective salary deferrals, as well as catch-up contributions when available, all of which is allocated to the pre-tax portion of the 401(k). Their total eligible compensation is $300,000, and the employer provides a 100% match on salary deferrals up to 6% of compensation, resulting in an additional $18,000 allocated to the pre-tax account.
All contributions are made at the end of the year, a conservative (and unrealistic) assumption. The after-tax contributions are immediately converted to the Roth account to maximize future tax-free growth. Investments grow at 7% per year, and this strategy is followed consistently each year until the employee reaches the age of 65. Contribution limits are assumed to remain unchanged throughout this period, another unrealistic assumption to make the math a little easier!
Result:
Pre-tax 401(k) receives $23,500 in elective salary deferrals and $18,000 in company matching contributions at the end of each year. These contributions will grow tax-deferred and be considered ordinary income when withdrawn. Catch-up contributions are also maximized and made to the pre-tax account.
After-tax 401(k) receives the difference between the total contribution limit and the amount contributed to the pre-tax account. Assets are immediately converted to Roth. These contributions will grow tax-deferred and qualified distributions will be tax-free.
Assuming the employee does this annually for 20 years, they will have:
$2.09 million in pre-tax 401(k) assets, and
$1.51 million in in Roth 401(k) assets
This high earning individual is able to create a $1.5 million bucket of future tax-free income despite being unable to contribute to a Roth IRA, thanks to the Mega Backdoor Roth and a little planning. Not too bad!
Source: Divvi Wealth Management. For illustrative purposes only.
Important Disclosure
This blog post is for informational purposes only and should not be construed as tax advice. Tax rules related to retirement accounts and contributions are complex and subject to change. Individual situations vary, and the application of these strategies may depend on specific circumstances. Readers are strongly encouraged to consult with a qualified tax professional or financial advisor to ensure compliance with applicable laws and to tailor strategies to their unique financial needs.
Divvi Wealth Management (DWM) is a State of Missouri registered investment adviser. Information presented is for educational purposes only intended for a broad audience. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. DWM has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. DWM has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the adviser’s ADV Part 2A for material risks disclosures.
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