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The Roth Series III: Mega Backdoor Roth IRA

Updated: Jan 3

The Roth IRA, Backdoor Roth IRA and Mega Backdoor Roth IRA are oft misunderstood and underutilized retirement savings strategies. In my Roth three-part series this week, I'm going to break down each Roth IRA strategy, who is eligible to use them, and what you need to know when using them.


This article focuses on the Mega Backdoor Roth IRA. You can find my other articles from the Roth IRA series here.


What Is The Mega Backdoor Roth Strategy?

The after-tax 401(k) has a much higher limit than the standard 401(k) annual limit; for 2023 it’s limited to $66,000 in total 401(k) contributions. This means $66k minus your combined pre tax and Roth 401(k) contributions (up to $22.5k for 2023) and minus any employer contributions. This usually leaves a lot of room for extra tax advantaged retirement contributions.


Who Is The Mega Backdoor Roth Strategy For?

The Mega Backdoor Roth may be for you if you (and your spouse if MFJ) are over the Roth IRA IRS-determined income limits. This is where backdoor strategies become useful. After maxing out your pretax 401(k), this is often the next retirement savings step.


The Mega Backdoor strategy is only available to employees with work sponsored 401(k) retirement plans, and only about a quarter of them at that. To be able to carry out a Mega Backdoor Roth, first you have access to an after-tax 401(k) through your employer. Employees with a 401(k) typically have two account options: A Traditional (aka pre-tax) account and a Roth 401(k) account. The After-Tax 401(k) is a third, completely separate account type only offered by certain, usually very large companies.


If you do not have access to an after-tax 401(k), but still want to maximize tax advantaged retirement savings, learn more about the regular Roth IRA and Backdoor Roth IRA strategies instead.



I Do Have An After-Tax 401(k). How Do I Do A Mega Backdoor Roth?

It's incredibly simple to contribute; all you have to do is choose a contribution amount in your 401(k) account portal, or call the custodian's customer service line for assistance doing so. The contribution amount will be a set percentage of your regular pay or bonus and incentive pay just like your pre tax and/or Roth 401(k) contributions.


Note: When setting up the account, you would want to elect to auto convert all future contributions to the Roth 401(k), effectively creating a tax free income stream in retirement. These few steps carrying out the Mega Backdoor Roth planning strategy. It’s wonderfully simple to execute, as the money is deducted right from your paycheck, no further paperwork is required come tax season, and you have the flexibility to change your contribution amount at any time, yet can have a powerful impact on your nest egg over time. These dollars are most effective when left to grow for as many years as possible, and would be the last funds you would want to draw on.


If I Have Access To A Mega Backdoor Strategy, Should I Take It?

Overall, Roth accounts are excellent retirement savings vehicles, and have more flexibility built in than other tax advantaged retirement accounts. That said, the decision between maximizing Roth accounts vs pre tax vs both comes down to expectations about your tax bracket in retirement. This can be a tricky assumption to figure out on your own, and is when having a trustworthy expert such as a CFP® professional brings a lot of value.


In Summary

Overall, this strategy is often a great plan add-on for households already maxing out their pre tax or Roth 401(k)s, who have extra cash flow, and who want to further maximize retirement contributions. Hello early retirement!


Thoroughly understanding and effectively planning for the Mega Backdoor Roth IRA strategy is an intricate process, though, so make sure to speak to your advisor before making any changes to your retirement plan or other part of your personal financial plan.



This article is a general overview to get you started without overwhelming you. This article is intended as financial education, not advice. Want to learn more about Mega Backdoor Roths? Here is an article from The College Investor with an incredible amount of detail on the Mega Backdoor Roth IRA retirement savings strategy. I'm here for any questions you may have after reading or support you need to maximize the Mega Backdoor strategy.



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Have general questions or a topic suggestion? Drop a comment on this post.

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📌 Sage Financial Planning LLC helps young and mid-career professionals know and do better with their finances and work towards financial freedom. For more information on our holistic financial planning offerings, please visit our Services page.

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