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Saturday, July 13, 2024

Making sense of the mega backdoor Roth

Making sense of the mega backdoor Roth


Roth IRAs are one of the greatest gifts ever given to retirement savers.

They enable individuals who qualify to enjoy tax-free qualified withdrawals of their money after they retire, or even earlier in some situations. This can help retirees stretch their savings even further.

But there’s one big catch when it comes to Roth IRAs.

If you earn too much money, you can’t open or contribute to one. You cannot open or contribute to a Roth IRA if your modified adjusted gross income (MAGI) is:

  • $153,000 or more for the tax year 2023 if you’re single
  • $228,000 or more for the tax year 2023 if you’re married and file jointly

But there’s good news. You can still reap the benefits of a Roth account even if your income exceeds these limits by using a technique known as a mega backdoor Roth. This strategy may enable you to sock away tens of thousands of dollars more for retirement this year.

How does a mega backdoor Roth work?

Here’s how the process works. If you can check the box on each of the following conditions, then you may qualify to for a mega backdoor Roth IRA.

  • Determine the maximum after-tax contribution you can make to your traditional 401k account. Make that contribution.
  • Roll over or convert this amount to a Roth IRA or Roth 401k. Unlike with a normal Roth IRA conversion, the principal will not be taxable. However, the earnings portion of the rollover will be considered pre-tax and subject to taxation at the time of conversion. Consider all your options and their features and fees before moving money between accounts.

Are you eligible?

You can only perform a mega backdoor Roth under the following conditions.

  • You participate in a 401k plan at work that allows after-tax contributions. Regular 401k contributions are made on an elective deferral, or pre-tax, basis. Fewer than half of 401k plans allow after-tax contributions, so check with your benefit plan administrator before moving forward.
  • The 401k plan allows in-service distributions to a Roth IRA or transfer of funds out of the after-tax portion of the account into a Roth 401k. If it doesn’t, you’ll have to wait until after you leave the company to perform a mega backdoor Roth.

How much can you contribute?

With a mega backdoor Roth, you may be able to contribute an additional $43,500 toward retirement in 2023 — on top of your regular plan contribution limits. If you have access to a Roth 401k at work, you can decide whether to roll over the funds into this Roth 401k or a separate Roth IRA. If your employer only offers a traditional 401k, then you’ll roll over the funds into a Roth IRA.

The bottom line: If you are unable to contribute to a Roth IRA because you earn too much money, or if you still have money left over to save for retirement after maxing out your traditional 401k and IRA, then a mega backdoor Roth might be a smart strategy for you.

The details in performing a mega backdoor Roth can be complex, so you should consult with your financial and tax advisors for guidance in your situation.


The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Compensation for freelance contributions not to exceed $1,250. Third-party data is obtained from sources believed to be reliable; however, Empower cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third-party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Empower of the contents on such third-party websites.

Certain sections of this blog may contain forward-looking statements that are based on our reasonable expectations, estimates, projections and assumptions. Past performance is not a guarantee of future return, nor is it indicative of future performance. Investing involves risk. The value of your investment will fluctuate and you may lose money.

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.