Learning Center

Mega Backdoor Roth IRA: A Powerful Retirement Savings Strategy

;

Article Highlights:

  • Understanding the Mega Backdoor Roth IRA

  • Benefits of the Mega Backdoor Roth IRA

  • Example Scenario

  • Considerations and Potential Pitfalls

A Roth IRA is a great way for employees and others with earned income to grow wealth. The advantages include tax-free growth on money withdrawn after age 59½, assuming the account has been open for at least five years.

Often high earners can’t contribute to a Roth IRA. If their modified adjusted gross income (MAGI) is $161,000 in tax year 2024 ($240,000 if married, filing jointly) or more, they can’t contribute to a Roth IRA at all. The inflation-adjusted amounts for 2025 are $165,000 and $246,000, respectively.

The Mega Backdoor Roth IRA is an advanced retirement savings strategy that allows high-income earners to contribute significantly more to their Roth IRA than the standard limits permit.

This strategy leverages the after-tax contribution limits of a 401(k) plan and the conversion rules of Roth IRAs to maximize tax-advantaged retirement savings. Here’s a detailed look at how it works, its benefits, and examples to illustrate its potential.

Understanding the Mega Backdoor Roth IRA - A Mega Backdoor Roth IRA involves making after-tax contributions to a 401(k) plan and then converting those contributions to a Roth IRA. After-tax contributions to retirement plans are those made with income which has already been subjected to income tax, while tax on pre-tax contributions has yet to be paid and will be payable when distributions are made. Here’s a step-by-step breakdown of the process:

  • Maximize Pre-Tax and Roth 401(k) Contributions: First, ensure you have maximized your pre-tax and Roth 401(k) contributions. For 2024, the limit is $23,000, or $30,500 if you are age 50 or older ($23,500 and $31,000 for 2025 or $23,500 and $34,750 if age 60 through 63).

  • Make After-Tax Contributions: Many 401(k) plans allow for after-tax contributions beyond the standard pre-tax and Roth limits. The total contribution limit for 401(k) plans, including employer contributions, is $69,000 for 2024 ($70,000 in 2025), or 100% of the employee’s compensation if less.

  • Convert to Roth IRA: Once after-tax contributions are made, you can convert these funds to a Roth IRA. This can be done either through an in-plan Roth conversion (if your 401(k) plan allows) or by rolling over the after-tax contributions to a Roth IRA, which would require a direct transfer by the 401(k) administrator to the Roth account.

Benefits of the Mega Backdoor Roth IRA

  • Tax-Free Growth: Contributions converted to a Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free. This can result in significant tax savings over time.

  • Higher Contribution Limits: The Mega Backdoor Roth IRA allows you to contribute well beyond the standard Roth IRA limits, which are $7,000 for 2024 and 2025, or $8,000 if you are 50 or older.

  • No Income Limits: Unlike direct Roth IRA contributions, which have income limits, the Mega Backdoor Roth IRA strategy is available to high-income earners who might otherwise be ineligible for Roth IRA contributions.

  • Distributions Not Required: As the owner of a Roth IRA, you would not be required to withdraw from the account once you reach the required minimum distribution age (currently 73) that applies to most other types of retirement plans. Thus, the Roth IRA can continue to grow tax-free until your death, at which time the heir(s) to the account will be required to take distributions.

Example Scenario - Consider Jane, a 45-year-old high-income earner with a 401(k) plan that allows after-tax contributions and in-plan Roth conversions. Here’s how she can leverage the Mega Backdoor Roth IRA:

  • Maximize Standard Contributions: Jane contributes the maximum $23,000 to her 401(k) plan in 2025.

  • After-Tax Contributions: Jane’s employer also contributes $10,000 to her 401(k). This leaves her with $36,500 ($70,000 total limit - $23,500 - $10,000) that she can, and does, contribute as after-tax contributions.

  • Roth Conversion: Jane converts the $36,000 in after-tax contributions to her Roth IRA. This amount will grow tax-free, and she can withdraw it tax-free in retirement.

Considerations and Potential Pitfalls

  • Plan Restrictions: Not all 401(k) plans allow after-tax contributions or in-plan Roth conversions. It’s essential to check with your plan administrator.

  • Tax Implications: While the conversion of after-tax contributions to a Roth IRA is generally tax-free, any earnings on those contributions before conversion may be subject to taxes.

  • Complexity: The Mega Backdoor Roth IRA strategy can be complex and may require careful planning and execution. Consulting with a financial advisor or tax professional is advisable.

The Mega Backdoor Roth IRA is a powerful tool for high-income earners looking to maximize their retirement savings. By leveraging after-tax 401(k) contributions and Roth conversions, individuals can significantly increase their tax-advantaged retirement funds. As with any advanced financial strategy, it’s crucial to understand the rules and potential pitfalls. Contact this office for assistance.

Share this article...

NEVER MISS A STORY.

Sign up for our newsletters and get our articles delivered right to your inbox.

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .

Social Media

Rose Tax & Financial

8 Pinon Ave
Cedar Crest, New Mexico 87008
Mon - Fri: 10:00am to 6:00pm
Sat: 10:00am to 2:00pm

Check the background of your financial professional on FINRA's BrokerCheck
Avantax affiliated Financial Professionals may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state. Securities offered through Avantax Investment Services℠, Member FINRA, SIPC, Investment Advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 3200 Olympus Blvd., Suite 100, Dallas, TX 75019. 972-870-6000.
The Avantax family of companies exclusively provide financial products and services through its financial representatives. Although Avantax Wealth Management® does not provide or supervise tax or accounting services, Avantax representatives may offer these services through their independent outside business. Content, links, and some material within this website may have been created by a third party for use by an Avantax affiliated representative. This content is for educational and informational purposes only and does not represent the views and opinions of Avantax Wealth Management® or its subsidiaries. Avantax Wealth Management® is not responsible for and does not control, adopt, or endorse any content contained on any third party website.
This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences.
For Important Information and Form CRS please visit https://www.avantax.com/disclosures.

FAQs Frequently Asked Questions
Type your message here.
Please fill out the form and our team will get back to you shortly The form was sent successfully