Mega Backdoor Roth: What is it and how does it work?

The mega backdoor Roth is a retirement savings strategy that allows high-income earners to contribute even more money to their retirement savings than the annual contribution limits for 401(k) and Roth 401(k) plans.

To take advantage of the mega backdoor Roth, you need to have a 401(k) plan that offers in-plan Roth conversions. This means that your employer's 401(k) plan allows you to convert your after-tax contributions to a Roth 401(k).

The annual contribution limit for 401(k) plans is $22,500 in 2023. However, the annual contribution limit for after-tax contributions is much higher, up to $58,000 in 2023. This means that you can contribute up to $58,000 to your 401(k) plan, and then convert all or a portion of those after-tax contributions to a Roth 401(k).

The mega backdoor Roth can be a great way to save for retirement if you have a high income and are able to contribute the maximum amount to your 401(k) plan. By converting your after-tax contributions to a Roth 401(k), you can grow your retirement savings tax-free.

How does it work?

The mega backdoor Roth works by taking advantage of a provision in the tax code that allows 401(k) plans to offer in-plan Roth conversions. This means that you can convert your after-tax contributions to a Roth 401(k) within your employer's 401(k) plan.

To do this, you will need to contact your plan administrator and request a conversion. The administrator will then take the after-tax contributions from your 401(k) account and move them to a Roth 401(k) account.

Once your after-tax contributions are in a Roth 401(k), they will grow tax-free. This means that you will not have to pay taxes on the growth of your money when you withdraw it in retirement.

Who is eligible?

Not everyone is eligible for the mega backdoor Roth. You need to have a high income and be able to contribute the maximum amount to your 401(k) plan.

In 2023, you are eligible for the mega backdoor Roth if you have a modified adjusted gross income (MAGI) of $215,000 or less if you are filing your taxes as single, or $430,000 or less if you are filing your taxes as married filing jointly.

If your MAGI is above these limits, you may still be able to contribute to a Roth 401(k), but you will not be able to take advantage of the mega backdoor Roth.

Is it a good option for me?

The mega backdoor Roth can be a great option for high-income earners who are looking to save for retirement. It allows you to contribute even more money to your retirement savings than the annual contribution limits for 401(k) and Roth 401(k) plans.

However, the mega backdoor Roth is not right for everyone. If you are not able to contribute the maximum amount to your 401(k) plan, then you may not be able to take advantage of the mega backdoor Roth.

Additionally, the mega backdoor Roth is a complex strategy, and you should consult with a financial advisor to see if it is right for you.