Mega Backdoor Roth IRA Contributions
Looking for more tax-advantaged savings? If you are already maxing out your workplace retirement plan, a backdoor Roth conversion might be the answer. Here’s how it works.
A mega backdoor Roth IRA contribution is the company retirement plan version of the backdoor Roth IRA contribution. If you are a higher-income earner who still has money to save after maxing out your regular 401(k) and IRA contributions, this strategy could allow you to save up to an additional $43,500 in a Roth 401(k) or Roth IRA in 2023,1 as long as your 401(k) plan has the appropriate provisions.
How it works
Step 1. Make an After-Tax Contribution to Your 401(k)
In 2023, the maximum annual amount you and your employer combined can contribute to your 401(k) is $66,000 (plus an additional $7,500 in catch-up contributions if you are 50 or older).2 To calculate the after-tax amount that you can contribute to your 401(k), subtract your regular 401(k) contributions and your employer’s matching contributions from that maximum. Assuming you max out your regular 401(k) contributions of $22,500 (plus an additional $7,500 if you are 50 or older), and provided there are no employer matching contributions, you can make after-tax contributions of up to $43,500 in 2023.3
Step 2. Convert Your After-Tax Contribution to Your Roth 401(k) or Roth IRA
Depending on the provisions in your 401(k) plan, you can either transfer the after-tax contribution to your Roth 401(k) using an in-plan rollover or to your Roth IRA through an in-service withdrawal. Any earnings on your after-tax contribution while it is in your 401(k) will eventually be taxable, but the IRS allows you to roll over those tax-deferred earnings into a traditional IRA when converting your after-tax contributions into a Roth account. Be sure to check the specific provisions of your employer’s 401(k) for any limitations.
Requirements
- Your 401(k) plan must allow you to make after-tax contributions.
- Your 401(k) plan must allow you to transfer your after-tax contributions either to your Roth 401(k) (via in-plan rollovers) or to your Roth IRA (via in-service withdrawals).
If you are unsure whether your 401(k) plan has both of these provisions, you can ask your human resources department or plan administrator for more information.
Example
John is 60 years old and contributes the maximum annual amount to both his 401(k) ($30,000 in 202311) and his IRA ($7,500 in 2023).4 He is looking to save even more using a mega backdoor Roth IRA contribution, but he wants to know the maximum after-tax contribution he can make to his 401(k) plan. If his total annual employer matching contributions are $10,000 in 2023, John can make after-tax contributions of up to $33,500 this year. Assuming his 401(k) plan has the appropriate provisions, John would transfer his after-tax contributions to his Roth 401(k) or Roth IRA, where he could benefit from tax-free growth.
A mega backdoor Roth contribution can be useful for higher earners who have workplace retirement plans. Speak with your wealth advisor to understand whether this strategy makes sense for your personal situation and for guidance on how to take full advantage of it.
1 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
2 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
3 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
4 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
ABOUT THE AUTHOR
Hope Carlson
Hope is a Partner, Wealth Advisor in our San Diego office. She joined legacy firm Dowling & Yahnke in 2017. She is a CERTIFIED FINANCIAL PLANNER™ professional and holds the Chartered Advisor in Philanthropy (CAP®) designation.
Prior to Dowling & Yahnke, Hope spent six years as the chief development officer at the Museum of Us, overseeing fundraising and marketing. She also served as the interim executive director for the San Diego Civic Youth Ballet in Balboa Park and for four years as a strategy consultant with the Boston Consulting Group.
Hope holds a Master of Business Administration (MBA) from Harvard Business School, where she was a Baker Scholar, graduating in the top 5% of her class. She also obtained her Master of Music in Vocal Performance and Literature from the Eastman School of Music and a Bachelor of Arts in Economics with Highest Distinction from the University of Virginia.
Trained as an opera singer, Hope is passionate about music and the arts. She lives in La Jolla with her husband and two daughters.
Timothy Lee, CFP®
Tim joined legacy firm Dowling & Yahnke in 2019 and designs customized personal financial plans. Prior to joining Dowling & Yahnke, he served as a Client Support Specialist at eMoney Advisor and completed internships with two local investment management firms in San Diego.
Tim has earned the CERTIFIED FINANCIAL PLANNER™ certification. He received his undergraduate degree in Economics from the University of California, San Diego. Originally from Torrance, CA, Tim currently resides in Rancho Peñasquitos.
