Is a Mega Backdoor Roth for You?

A mega backdoor Roth is an advanced retirement savings strategy that allows certain individuals to contribute significantly more to a Roth account—either a Roth IRA or Roth 401(k)—than traditional limits typically allow. It's especially helpful for high earners who are ineligible to contribute directly to a Roth IRA due to income limits. This strategy involves two steps: first, making after-tax contributions to your 401(k), and second, converting those funds into a Roth account. It is important to note that not all retirement plans offer this option, so the ability to use the strategy depends entirely on the features of your specific 401(k) plan.

Why might someone use this strategy? Normally, there are caps on how much you can contribute to pre-tax and Roth 401(k) accounts. But with after-tax contributions, you may be able to save up to $70,000 or more annually (depending on your age and employer contributions). Once those after-tax funds are in your plan, you can convert them into a Roth account, where any future growth is tax-free. Keep in mind, though, that you may owe taxes on any earnings when you convert, so it is crucial to evaluate the timing and tax impact.

If you are wondering whether a mega backdoor Roth is right for you, please contact your wealth advisor to discuss your specific circumstance. Your advisor will help you determine whether the benefits align with your income level, retirement goals, and current tax situation.