Mega Backdoor Roth IRAs: What You Should Know

A mega backdoor Roth is a great option to quickly build a tax-free bucket of money for individuals who have maxed out other retirement savings vehicles, still have surplus to be invested, and have a 401(k) plan that allows for this strategy. Consider this an additional tool in your toolbox. 

“Should I consider contributing to a Roth IRA or Roth 401(k)?”

In recent years, this has become a popular question, as interest in building a tax-free bucket of money has increased. You can make annual contributions to a Roth IRA, but contributions are capped at $6,000 per year ($7,000 if you are 50 or older). Income limits restrict who can make direct contributions to a Roth IRA. Individuals who exceed these income limits may consider a Roth 401(k) or completing a backdoor Roth since there are no income limits associated with these options. There is also a lesser-known strategy you can use to direct significant amounts to a Roth IRA, referred to as a mega backdoor Roth.

What is a mega backdoor Roth?


A mega backdoor Roth is when an individual makes an after-tax contribution above the annual 401(k) contribution limits to their 401(k) plan. In 2021, the maximum amount that can be contributed to a 401(k) is $58,000, or $64,500 if you are 50 or older. The IRS determines the amount contributed by combining employee and employer contributions.

To determine how much you can add to the after-tax portion of the plan, take the maximum contribution amount mentioned above and subtract employee and employer matching contributions. The remaining amount is what could be contributed after-tax to the 401(k) and used for the mega backdoor Roth.

What is needed to complete a mega backdoor Roth?

A mega backdoor Roth is complicated and will only work under specific circumstances. Below is a list of three things required before completing this strategy:

  • You have money left over to save.
    • Consideration for this strategy only begins once you have maximized 401(k) and Roth IRA contributions. Then you can assess other opportunities: building a rainy-day fund, paying down debt, college savings, or contributions to a Health Savings Account, to name a few. A mega backdoor Roth IRA is a phenomenal way to get large amounts of money into the tax-free bucket but will only work for those who can set aside a lot for retirement savings.
  • Your 401(k) plan permits after-tax contributions.
    • After-tax contributions to a 401(k) are considered separate from your traditional and Roth 401(k) contributions. If your plan does not allow for after-tax contributions, then the mega backdoor Roth strategy is not an option. You will need to confirm with your employer or review your plan description to determine if after-tax contributions are permitted.
  • Your 401(k) plan allows for in-service withdrawals or rollovers.
    • An in-service withdrawal allows employees who are still working to distribute after-tax contributions from their 401(k) to a Roth IRA outside of the plan.
    • A rollover allows employees to transfer funds from their after-tax portion of the 401(k) into the Roth 401(k) bucket. With this type of transaction all money will remain inside the 401(k) plan.
    • This works best when individuals transfer after-tax contributions as quickly as possible into the Roth. Timely in-service withdrawals or rollovers will result in the most tax-free growth.

A mega backdoor Roth is a great option to quickly build a tax-free bucket of money for individuals who have maxed out other retirement savings vehicles, still have surplus to be invested, and have a 401(k) plan that allows for this strategy. Consider this an additional tool in your toolbox. Completing a mega backdoor Roth is complex so before making any decisions you should consult with your tax professional and a financial advisor. What does it mean to be Truly Cared ForTM? It means we understand your passions and use proven methods to help you reach your goals.

PLEASE SEE IMPORTANT DISCLOSURE INFORMATION at www.fostergrp.com/disclosures. A copy of our written disclosure Brochure as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.