Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Your article was successfully shared with the contacts you provided.

Many of your clients might benefit from using a Roth IRA as part of their retirement savings strategy. But if you have clients who earn too much to contribute to a Roth IRA, you are likely familiar with the backdoor Roth strategy. For clients whose circumstances fit, you might also consider the mega backdoor Roth strategy as a way to funnel larger amounts into a Roth IRA account for them.

What Is the Mega Backdoor Roth?

A backdoor Roth IRA generally involves making an after-tax contribution to a traditional IRA account and then converting that amount to a Roth IRA. The taxation of the conversion will depend upon whether or not the client had additional funds in a traditional IRA account that were contributed on a pre-tax basis and/or that represent earnings on funds in the account.

A mega backdoor Roth involves your client making after-tax contributions above the annual 401(k) contribution limits to their employer’s 401(k) plan. This could amount to them being able to contribute up to an extra $37,500 per year. For high earning clients who can afford to do this, the mega backdoor Roth can be a way to funnel significant amounts to a Roth IRA account. 

How Does the Mega Backdoor Roth Work?

In order for a mega backdoor Roth strategy to work, your client’s employer must allow after-tax non-Roth contributions to be made to the plan participant’s accounts. These contributions are made to a separate bucket over and above your client’s normal contributions to the plan. 

For 2020, the maximum contribution that is allowed is $37,500. Again, this is over and above the $19,500 or $26,000 (for those 50 or over) that can be contributed to a traditional or Roth 401(k) account for 2020. About 40 percent of all 401(k) plans offer this option. 

The mega backdoor Roth works best if your client’s employer allows in-service withdrawals. In some cases, this is only allowed once participants reach age 55 or 59 ½. About 70 percent of all plans allow some sort of in-service non-hardship withdrawal. Even if the plan doesn’t allow for them at all, or if they are limited to participants who have attained a certain age, this strategy can still be effective. 

If the plan is set up to accommodate these after-tax contributions, your client would need to subtract any company matching that is in place. For example, if their employer provided $5,000 in matching contributions for the year, the most your client could contribute for 2020 is $32,500. 

In this scenario, your client would contribute up to the maximum allowed in after-tax contributions, then do an in-service withdrawal as a rollover to a Roth IRA account. The best scenario is if their plan allows these in-service withdrawals at any time or any age. Note that it’s generally best to do this as a rollover versus as a withdrawal from the plan, as this will avoid inadvertently triggering any taxes or penalties for clients under age 59 ½.

Even if your client’s plan doesn’t allow in-service withdrawals, or if they are limited to participants over a certain age, like 55 or 59 ½, this still works. Your client can accumulate money in this after-tax pool. They can do the rollover when they attain the specified age or when they leave their employer, if earlier than that age. The after-tax contributions will not be taxed; however, any earnings on these contributions would be subject to taxes.   

For clients who can’t contribute to a Roth IRA, or who want to ultimately accumulate large amounts in a Roth IRA account, the mega backdoor Roth is a strategy to consider if their employer’s 401(k) plan allows for it. 


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.