Ever since I started saving for retirement in 1999, I’ve been a proponent of tax-deferred retirement vehicles like the 401(k) and skeptical of tax-now vehicles like the Roth IRA. Working in banking, I was already being taxed out the wazoo and had no desire to pay even more. Frankly, I wasn’t even familiar with the Roth IRA or the mega backdoor Roth IRA when I first started working.
The Roth IRA was established under the Taxpayer Relief Act of 1997 and became available to taxpayers on January 1, 1998. It was named after Senator William Roth of Delaware, a key advocate for this retirement savings vehicle.
Unlike traditional IRAs or 401(k)s, which use pre-tax contributions but require taxes on withdrawals, Roth IRAs are funded with after-tax dollars, allowing for tax-free withdrawals on qualified distributions.
Slowly Warming Up to the Roth IRA
In 1999, I had just landed my first job out of college. Retirement planning wasn’t my top priority. After maxing out my 401(k), I focused on growing my career and building a taxable brokerage account to one day buy property—my favorite asset class for building wealth.
Throughout my 20s and 30s, I stayed firmly against the Roth IRA. I was consistently in a federal marginal income tax bracket above 24%, so paying taxes up front felt like surrendering to an inefficient government that wastes hundreds of billions of taxpayer dollars annually.
However, in my early 40s, earning a much lower income after early retirement, I began to see the appeal of the Roth IRA. I even wrote a post titled Why I Didn’t Contribute to a Roth IRA But Why You Should as a way to make amends for my earlier stance.
The ability to let investments grow tax-free for decades and withdraw without any taxes is a powerful strategy for retirement income diversification. I see this benefit much more clearly now as I inch closer to traditional retirement age.
The Mega Backdoor Roth IRA: A Smart Move for Super-Savers
I don’t want to repeat my earlier mistake of dismissing the Roth IRA due to stubbornness or a lack of understanding. That’s why I decided to focus on the Mega Backdoor Roth IRA to see if it’s something we can take advantage of.
The Mega Backdoor Roth IRA is a three-step strategy that allows employees to contribute far more to their retirement plans than the standard limits. For example, in 2025, the employee 401(k) contribution limit is $23,500. Adding employer contributions, the total allowable contribution is $70,000. However, while employees can control their own contributions, they can’t dictate how much their employers contribute.
If you’re able to contribute the maximum $23,500 a year, that’s fantastic—only about 13%–15% of employees manage to do so. But with the Mega Backdoor Roth IRA, you can go beyond the employee maximum and save even more.
This strategy is ideal for high-income earners, super-savers, and personal finance enthusiasts looking to maximize their retirement wealth. Since you’re reading Financial Samurai, that’s likely you! For context, the median income for all U.S. households is about $80,100 in 2025, and $120,000 for married couples, according to the Census Bureau.
Why Use the “Backdoor”? Income Limits For Roth IRA Contribution
The main reason to explore the Mega Backdoor Roth IRA is the income limits for contributing to a standard Roth IRA. When I first started working in banking, I wasn’t eligible to contribute after my first year due to these restrictions. And it took me a full year of working before realizing the benefits of a Roth IRA.
Arbitrary income limits always struck me as counterintuitive. Shouldn’t the government encourage everyone to save for retirement, especially younger employees? The more people save now, the less they’ll rely on government support later.
Here are the latest Roth IRA income limits for 2025:
- Single filers: You can make a full Roth IRA contribution if your income is below $150,000.
- Married couples filing jointly: You can make a full contribution if your joint income is below $236,000.
If your income is higher:
- Single filers earning between $150,000 and $165,000, and joint filers earning between $236,000 and $246,000, can make a partial contribution.
- Single filers earning $165,000 or more, and joint filers earning $246,000 or more, are ineligible to contribute directly to a Roth IRA.
This is where the Mega Backdoor Roth IRA comes in, offering a way for high-income earners to bypass these restrictions and continue growing tax-free retirement savings.
How To Contribute To A Mega Backdoor Roth IRA
1) Employees start by maxing out their pre-tax 401(k) contributions, which the IRS recently announced will be $23,500 in 2025. For those 50 and older, there’s an additional $7,500 in catch-up contributions.
2) Next, they allocate more of their paycheck toward after-tax contributions within their 401(k) plan. For example, the employee contributes another $20,000 after-tax to their 401(k).
3) Finally, they convert those after-tax contributions to Roth status, either immediately or automatically if their plan allows. This ensures the contributions grow tax-free and can be withdrawn tax-free in retirement.
Pretty easy right? This strategy is particularly valuable for high earners who exceed the income limits for a regular Roth IRA. By leveraging their 401(k), they can save up to $70,000 in 2025—or $77,500 if they’re 50 or older—while taking full advantage of tax-free growth and withdrawals. These figures are total figures, including the employer's contribution.
The problem is, not all employers and 401(k) providers provide the option to do a mega backdoor Roth IRA. Hence, you must ask your HR personnel for this option.
Knowing Your Marginal Federal Income Tax Rate Is Important For Mega Backdoor Roth IRA
Here’s the thing about contributing to a Mega Backdoor Roth IRA: once you earn over $197,300 as a single filer or $394,600 as a married couple, your federal marginal income tax bracket increases by 8%, bumping you up to the 32% bracket for 2025. From there, the brackets continue to climb, reaching 35% and eventually 37%.
Will you truly be excited about paying a 32% – 37% marginal federal income tax rate to grow your Mega Backdoor Roth IRA? The answer depends on your outlook for future tax rates and how much you expect to earn or withdraw once you hit traditional retirement age (60+).
With Trump as president, these marginal federal income tax brackets are likely to remain the same from 2025 to 2029. However, taxes could increase under the next president, which is why diversifying your retirement savings remains crucial.
Thoughts On Contributing To A Roth IRA By Tax Bracket
Here are my estimated probabilities for a positive outcome if you do a Roth IRA conversion or contribute to a Roth IRA at your current marginal federal income tax bracket. A positive outcome is defined as saving money on taxes.
- 10% tax bracket: 95% chance contributing or converting to a Roth IRA is the right choice
- 12% tax bracket: 90% chance contributing or converting to a Roth IRA is the right choice
- 22% tax bracket: 80% chance contributing or converting to a Roth IRA is the right choice
- 24% tax bracket: 70% chance contributing or converting to a Roth IRA is the right choice
- 32% tax bracket: 45% chance contributing or converting to a Roth IRA is the right choice
- 35% tax bracket: 40% chance contributing or converting to a Roth IRA is the right choice
- 37% tax bracket: 35% chance contributing or converting to a Roth IRA is the right choice
- 39.6% tax bracket: 20% chance contributing or converting to a Roth IRA is the right choice
The Key Reason To Contribute To A Mega Backdoor Roth IRA
The ultimate reason to follow through with a Mega Backdoor Roth IRA is that you would have to pay taxes on any amount over the 401(k) contribution limit anyway.
So, instead of paying taxes on your income and investing the money in a taxable brokerage account, why not contribute after-tax dollars to a Mega Backdoor Roth IRA and let the money compound tax-free? When it's time to withdraw, all profits will be tax-free as well, unlike the taxable gains from a brokerage account.
When Can You Withdraw From A Mega Backdoor Roth IRA Penalty-Free?
You can withdraw contributions at any time. To be able to withdraw earnings tax- and penalty-free, the Roth IRA must be at least five years old, and you must meet the age requirement (59.5), or qualify for one of the exceptions like first-time home purchase, disability, or education expenses. So that's a downside, having to wait until 59.5 if you want to use the money now to buy a house or something.
You're also avoiding the annual taxes on dividends and interest that would otherwise be taxed in a brokerage account. Plus, you'll also avoid capital gains taxes on any appreciation when you eventually withdraw from the Roth IRA. The ability to compound tax-free over time is a huge benefit.
Rolling the Mega Backdoor Roth funds into an existing Roth IRA account where the five-year rule has already been satisfied can help simplify and accelerate access to penalty-free withdrawals. Now let's look at an example.
Example of a Penalty-Free Withdrawal from a Mega Backdoor Roth IRA
Scenario:
- Contributions: John contributes $20,000 in after-tax dollars to his 401(k) and immediately rolls it into a Roth IRA via the Mega Backdoor Roth strategy.
- Earnings: Over 10 years, these contributions grow to $35,000 due to investments.
- Account Age: The Roth IRA has been open for 10 years.
- Age: John is 60 years old.
Steps:
- John withdraws $35,000 from his Roth IRA:
- The $20,000 in contributions can be withdrawn tax-free and penalty-free at any time because they were after-tax contributions.
- The $15,000 in earnings is also withdrawn tax-free and penalty-free because:
- John is over 59½ years old.
- The account has been open for more than five years.
Outcome:
John can withdraw the entire $35,000 without paying any taxes or penalties. Adopting a tax-now strategy helps John save.
Alternate Scenario: Early Withdrawal of Contributions Only
If John were 45 years old and needed $10,000, he could withdraw up to $20,000 of his contributions tax-free and penalty-free. However, withdrawing from the $15,000 in earnings would result in taxes and penalties unless he qualifies for an exception.
Best Income And Net Worth Combination For A Mega Backdoor Roth IRA
For those with high net worths and low incomes, you have the ideal combination for taking advantage of the mega-backdoor Roth strategy.
For example, let’s say you’re a 47-year-old single individual with a $3 million net worth, but one year you decide to leave your job in March and only make $48,000 for the whole year. You're in the 12% marginal federal income tax bracket, which is quite reasonable. In this case, you should consider contributing the maximum $23,500 to your 401(k) employee contribution and then making an additional $24,500 in after-tax contributions to your 401(k).
Given your low tax bracket today, it's very likely that the 12% rate you're paying now will be lower than the rate you will face when Required Minimum Distributions (RMDs) start at age 73. This applies to retirement accounts like traditional IRAs, 401(k)s, and other tax-deferred retirement plans, as outlined in the SECURE Act 2.0.
By contributing to a mega-backdoor Roth IRA, you can take advantage of lower taxes now and avoid potentially higher taxes in the future. For income, you can hopefully live off the passive income your $3 million net worth generates.
Talk To Your Employer And Plan Provider
Every employee looking to supercharge their retirement savings should ask their employer and plan provider about the mega backdoor Roth IRA option. Yes, paying taxes upfront can feel painful, but remember, you would have had to pay those taxes on any contributions beyond the employee 401(k) limit anyway.
Happy mega retirement savings! When your knees start creaking and your back starts complaining, you’ll be glad you put in the work while you still had the energy.
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Sam- Great write up! Still in prime earning years here (late 30’s) and luckily took advantage of Roth beginning in early 20’s. Have also been fortunate that my employer offers both Tradional and Roth 401k options. I am currently splitting my contribions 50/50 between the two however your thought process (and others in these comments) has me reconsidering to go 100% Roth to keep building that bucket.
Question for you and i might be pushing you a bit here: It would be interesting to see your thoughts around your target net worth by age frameworks and also 3% rule type scenarios and how they should be adjusted for heavy Roth savers?
Thanks!
Tyler
Diversification of retirement savings contributions is a good thing. I don’t think you’ll ever regret it.
Your request sounds a little complicated. My target net worth by age should be relevant to such scenarios, with the minimum goal of getting to a net worth multiple equal to at least 10X your average annual gross income, and 20X for the ultimate goal.
I do think this post is highly relevant too: Investment Minimum Threshold Where You Can Start Taking Things Easier
Sam, I’m confused about whether I am able as a sole proprietor over age 65 to contribute not only the 92.9% of net profit for the year ($16,430 on profit of $17,680), but also make catchup contributions. When I search for an answer online, I get conflicting answers. You seem to be really on top of doing your own taxes, so I’m wondering if you would weigh in.
Additionally, I also get conflicting answers when I research whether the Deferred Compensation W-2 I get every year is considered “Earned Wages” to the IRS. A portion of it most certainly was earned back in my working days, but a good portion of it also comes from the market appreciation of having it invested for 25 years. Thoughts?
Sam
I am doing big IRA to ROTH conversions to reduce my required minimum distributions that are 12 years away. One of the things I missed in my retirement planning was the impact of RMD’s to the portfolio/estate planning. What I did not pay attention too was the tax implication of a growing portfolio in qualified accounts once RMD’s start. From an estate perspective when the qualified money rolls to the estate it has to generally be withdrawn in 10 years… Roth IRA’s do not have that restriction. The other great thing about pulling from a Roth IRA in retirement it is not part of my income which is another tax benefit even on social security earnings. So looking at ROTH IRA’s from an overall tax perspective really shows their value to me..
Hi, Sam. I was like you, and was skeptical of the Roth IRA during my working years. I retired at 61 (now 65), and I wish I would have listened to those that tried to sell me on using the Roth IRA feature of my company’s 403b plan. I will be able to sit comfortably in the 24% tax bracket until I have to take my RMDs starting at 73, but I’m already bumping into the IRMAA tax starting this year. If I don’t start withdrawing from my IRA or moving money to Roth, my RMDs will trigger about $5200 – $7500 in annual IRMA taxes (my husband and my contributions combined). Obviously, I would have to pay taxes on either of these withdrawal options, but it just hurts to have to pay so much in IRMAA on top of that. In hindsight, had I listened to those talking about Roth IRAs, I would have put some portion of 403b contributions into the Roth — it would have been easier to stomach the taxes then, while I was still in peak earnings, and my portfolio would be balanced between Roth and traditional IRAs. My recommendation to those that haven’t retired yet, is to spend some quality time considering the Roth IRA — you’ll be grateful later, when it’s too late to do anything without IRMAA implications. Also, I haven’t heard anything about future IRMAA considerations by Congress, but it would seem that as they look for ways to offset Medicare financial issues, increasing IRMAA may land on their radar.
Thanks for sharing your experience.
For those who do not know what IRMAA is.
IRMAA stands for Income-Related Monthly Adjustment Amount. It is an additional charge added to your Medicare Part B (medical insurance) and Part D (prescription drug coverage) premiums if your income exceeds certain thresholds. IRMAA is determined based on your modified adjusted gross income (MAGI) as reported on your tax return from two years prior.
Key Points About IRMAA:
1. Income Thresholds:
• IRMAA applies if your MAGI exceeds $97,000 (individual) or $194,000 (joint) for 2024. These thresholds are adjusted annually for inflation.
2. How It’s Calculated:
• The Social Security Administration (SSA) uses your IRS tax return from two years earlier (e.g., your 2022 income determines your 2024 IRMAA).
3. Part B Premiums with IRMAA:
• Standard Medicare Part B premium (for 2024): $174.70/month.
• With IRMAA: Premiums increase on a sliding scale, potentially exceeding $600/month for the highest income brackets.
4. Part D Premiums with IRMAA:
• The IRMAA for Part D is added to your plan’s base premium and ranges from $12.90 to $83.50/month in 2024, depending on your income.
5. Appeals:
• If your income has dropped significantly due to life changes (e.g., retirement, divorce), you can file an appeal with the SSA to request a reduction in your IRMAA.
Why It Matters:
IRMAA adds a significant cost to Medicare for high-income individuals, making it an important consideration in retirement planning and tax strategy. Managing taxable income in retirement (e.g., Roth conversions, tax-efficient withdrawals) can help some retirees avoid or minimize IRMAA charges.
If I distribute from my 401k/IRA and put the funds into a low fee, diversified index fund the tax implications are the same. With a taxable account, I have full access to my money with the potential to tax loss harvest, tax gain harvest, step-up basis and foreign tax credits. Is IRMMA a big deal to multi-millionaires? If my investments in the Roth go down, no way to recoup. As we have just seen, tax rates don’t always go up. With the potential for lessened taxation on Soc Security, maybe it will lower AGI and increase the 0% LTCG and dividend bracket. Life is unpredictable. Why give your tax dollars away when you don’t have to. If I have too much in my 401k/IRA, I will utilize QCD’s or deduct for long term care.
I’m still struggling with the idea of Roth conversions especially during high income years. For the majority of w2 earners, their tax rate will be lower in retirement. Wouldn’t it make more sense to pay taxes on 401k withdrawals when their tax rate is lower (during retirement) versus now?
Sam – this is very interesting. I have generally ignored the mega back door Roth as I had always thought it doesn’t make sense for us, but now I am perhaps giving it a second thought?
Background that others may find helpful: As a small business owner, I own our 401k plan so I could add the provision to our plan and restate the documents fairly easily. My wife and I contribute the max $23k + $23k + $7.5k catch-up for her. Plus about $10k in Safe Harbor. We are already top heavy, so we have to undergo ACP, non-discrimination testing anyhow and already provide safe harbor contribution AND profit sharing to our employees, so the mega door Roth doesn’t provide an additional burden. Our general strategy is to issue W2 income to ourselves up to the Social Security max cut off each ($168k) (to get max credits into the system), and then contribute whatever profit is remaining in the companies into a cash balance (defined benefit) pension plan, tax-deferred (the lifetime limit there is $3.5MM each so this is not a practical constraint, we are WAY below that) . So the business profits are then ~$0.
QUESTION: Does anybody know if the additional contributions by us which end up in a Roth anyhow screw up the existing 401k plan testing? (I guess I could check with our plan administrator if they have any input)
QUESTION: would I have to contribute to the 401k for the mega back door Roth out of our W2 income? trying to get my head around the math here. Or could I contribute to the conversion somehow out of investment income, outside of the 401k plan and outside of W2? With additional interest/dividend income and few deductions, we are pushed into the 32% or 35% marginal bracket usually, so not sure the calcs work here… but as you are saying if you have to pay taxes anyhow…
You can contribute into “non-deductible IRA” without adding income to W2 up to maximum limit and immediately convert it into Roth IRA for both you and spouse. Be careful of pro rata rules if you have existing traditional IRAs.
Hey Sam,
My wife and I would always max out retirement savings in any given year, but those individual vehicles would change based on income and maximum contributions. As a result, we contributed the max to a SIMPLE IRA when we were self employed, we’d max out an IRA or a Roth IRA every year, always taking advantage of the spousal contribution since my wife ran the home, our side gigs, and home educated our 5 children for going on 26 years now. When I sold my tech business 2 years ago I became an employee again with the company that bought my business. We then maxed out the 401k, the standard IRA (even though there was no tax benefit due to income level). We’ve saved probably at least 30-50% of our income the past decade or so which includes taxable investments. Oh, and we saved every year in a Coverdell IRA for each of our 5 kids starting in 1998. None of them have every had a dime of student loans. We buy used cars, and run them until they die. Still have our first married car, a 2003 Mazda MPV – runs great! Primary house was paid off years ago and I’m ready to retire in a couple of years when I turn 60. Love your insights and follow your advice regularly!
“You can withdraw contributions at any time. To be able to withdraw earnings tax- and penalty-free, the Roth IRA must be at least five years old, and you must meet the age requirement (59.5), or qualify for one of the exceptions like first-time home purchase, disability, or education expenses.”
This article made me research Roth IRA’s more because I was considering a withdraw and paying the 10% penalty to fund a real estate deal.
I found that rollover funds into a Roth are not available to withdraw for 5 years if the Roth account has not been opened for 5 years and the amount being withdrawn is more than the previous contributions to the account.
The IRS uses a FIFO basis, so if there was $10k in previous contributions, and then $10k rolled over, and then $10k is withdrawn, the withdraw is considered as being from the previous contributions, not from the rollover.
You did say, “withdraw contributions at any time,” and not rollover funds. But is that clear enough to the reader, or am I wrong?
You can withdraw your original contributions to a Roth IRA at any time, tax- and penalty-free. However, if you’ve rolled over funds into your Roth IRA, those rollover amounts are subject to a five-year waiting period before they can be withdrawn without penalty, even if the Roth account itself is over five years old. Additionally, earnings on your Roth IRA are only tax- and penalty-free if the account is at least five years old and you meet one of the qualifying conditions (age 59.5, first-time home purchase, disability, etc.).
The IRS uses a FIFO (First In, First Out) basis to determine the source of withdrawals. This means your contributions are considered withdrawn first, followed by rollovers and then earnings. For example, if your account contains $10,000 in contributions and $10,000 in rollovers, withdrawing $10,000 would be treated as coming from contributions, avoiding penalties or taxes
Hi Sam,
I might be wrong here but I think you’re forgetting to mention the pro-rata rule. To my understanding, you can’t just withdraw contributions. If you have $1000 of contributions and $1000 of gains in the account, asking to withdraw $500 would trigger the pro-rata rule, which means you’ll actually be withdrawing $250 from the contributions (tax- and penalty-free) and $250 from the gains (which you’ll have to pay tax for if withdrawing before retirement age). Am I missing something here?
Thanks for bringing up the pro-rata rule! It’s important for traditional IRAs with mixed pre-tax and after-tax contributions. However, in the context of a mega backdoor Roth IRA, the rule typically doesn’t apply.
When after-tax contributions from a 401(k) are rolled directly into a Roth IRA, they’re kept separate from pre-tax funds, avoiding the pro-rata issue. Gains in the 401(k) can be rolled into a traditional IRA or taxed at the time of transfer.
For Roth IRA withdrawals specifically, contributions can be accessed tax-free anytime without pro-rata concerns. Let me know if I missed anything!
You’re right! I think I was thinking of pre tax / traditional accounts! Thanks for correcting me!
I’ve contributed the max to my 401k each of the last 3 years and done a mega backdoor roth conversion. As you mention briefly, there really is no downside to it, unless you need access to that money before 59.5 (I won’t). If I’m in the 35% tax bracket, I’m already paying 35% on those dollars no matter what I do with them (assuming my HSA and pre-tax 401k are maxed). By putting them in a Roth and leaving them for 10 years, it’s a near certainty that I will get some gains and pay $0 in tax on those gains.
Hi Sam! How did you go about coming up with this probability?
“35% tax bracket: 40% chance contributing or converting to a Roth IRA is the right choice”
We have the opportunity to max out 403b and 457b in tax deferred or Roth (with catchup). So, 122K per year.
I ported the figures over from another post I wrote on doing a Roth IRA conversion, and shared some new percentages.
But the fact of the matter is, given you have to pay that tax rate anyway on income, if you don’t need the liquidity to buy something, you might as well do a mega backdoor Roth IRA to be able to withdraw the gains tax-free.
So perhaps I should take that section out.
I don’t follow you here. High income (500K) with 1.2M in tax deferred retirement accounts. 250K in pensions will fill up some tax brackets in retirement in 12 years. Trying to figure out if tax break now or later is the right choice.
Sam – two other huge benefits of Rothing are that there are no RMDs which can help those with lots of tax-deferred assets, and upon the death of you plus your spouse, the secondary beneficiaries (children) have potentially an additional 10 years of tax-free growth
Thanks for sharing and yes indeed.
I would love to see more examples of the “problem“ of having a huge tax deferred account like a 401(k).
The thing is, even if you have a $5 million 401(k), the tax rate hit is not that big if you withdraw $100,000-$200,000 a year. Maybe I’m just used to paying a high marginal federal income tax rate since 2001 that I’m just used to taxes.
But having that additional 10 years of tax regrowth for your children is nice. At the same time, will our old children really need the money then?
I’d love to hear your thoughts.
Sam – a few things to keep in mind:
1) Using your $5 million tax-deferred example which is readily possible with 40-years of 401k compounding, the RMD’s will approach $200K/yr. Add in Soc Sec, some other income and perhaps a pension, and suddenly a retiree’s income is into the 32% tax-bracket and exceeding your 24% sweet spot. A good problem to have, but not tax optimal.
2) The government needs more money, so eventually today’s low tax rates from the 2017 Tax Cuts and Jobs Act have a decent likelihood of increasing. The 2017 tax rates may get extended for another 4 years based on the recent election, but tax rates probably will increase at some point.
3) Retirees often put off tax-deferred (401k) withdrawals until the age when RMD’s kick in. This adds a 10-15 year window for assets to grow further. That $5 million can become $10-12 million. Even a more modest $2 million 401k can grow to $5-6 million resulting in unanticipated tax-bracket creep when RMD’s kick in.
4) Upon the death of the first spouse, the surviving spouse’s tax rates increase substantially. Roth’s help manage this issue by paying married-filed-jointly tax-rates for the conversion versus single tax-rates (and reduced deductions) for the surviving spouse.
Here is my general playbook on Rothing:
AA) Young workers in their lowest marginal tax-rate years definitely should be Rothing and HSAing to the max – probably even if they struggle to afford it. Borrow from Mom and Dad as this is the best legal money-laundering, tax-scam that the government provides us all. This also keeps future RMDs in check.
BB) Mid to late career workers in their peak earnings years want to HSA to the max. They then may want save via either Roth (covert) or stay with Tax-Deferred depending upon how their marginal tax rates and savings rates work out.
CC) Pre-RMD retirees with large tax-deferred balances, likely want to Roth convert in the years between retirement and when RMDs start. Roth converters need to also consider the impacts of state income taxes and IRRMA after age 63.
DD) Roths are also fantastic from an estate planning standpoint for your surviving spouse and children.
All great points. Thank you.
I’m most curious about the window of the traditional retiree retiring after 60 and before Social Security and RMDs, and then doing Roth IRA conversions. That seems like a no brainer for many, when their marginal income tax rate is low due to no more active income right?
The “problem” some of us have, is that we’ve been so focused on building our taxable investment portfolios that it now spits out an income that pushes up to the to tax brackets. So even after traditional retirement with no active income, we’d still have to pay a high tax rate. Any thoughts around this?
But yes, young workers need to contribute as much as possible to their Roth IRAs now. It’s such a no brainer.
Related: Why I never contributed to a Roth IRA But Why You Should
What a coincidence! I’m working with my employer to look for new 401(k) providers and this is at the top of my list. I’ve been urging for it over the last few years and I’m hoping to follow through with it now.
Can we compile a list of what plans do offer this?
My buddy at Microsoft has a Fidelity plan that offers this. I know Vanguard has plans that offer it too.
That would be great if you could compile a list and send it over since you were looking. Thanks for contributing and let us know what you find out.
Fidelity and Vanguard are great. I use Fidelity myself for the past 25 years.
While looking into how to get my company to have a 401(k) plan that offers a Mega Back Door Roth I found the following that might be useful for others:
I would be curious if anyone has been able to get their HR department to update or modify the company plan to allow this.
My company’s 401k plan sucks. No after tax contributions are permitted, and because of the industry it is in, the “highly compensated employee” threshold is absurdly low (around $150k). I have been in this role for 12 years and only been able to make one year’s contribution (my first year). Ever since, I have been completely blocked from contributing anything into the 401k.
A mega backdoor Roth would be a dream in this scenario, but unfortunately for me that’s all it is…a dream, not a reality.
Can you tell me more about not being able to contribute the maximum employee 401(k) contribution? Because I worked in a highly paid industry as well, investment banking, and I never had a problem contributing the max. And neither did anybody who earned much more than me, I don’t think.
A $150,000 income threshold to be able to contribute to a 401(k) seems absurdly low indeed.
Sam what about regular IRA? My income is over the limit for roth but i have been still contributing to a regular IRA for both me and my wife after of course max out 401k. Do you suggest keep doing that? Thanks
The income limit to contribute to a traditional IRA, with pretax dollars, is even lower than the income limit to contribute to a Roth IRA. Are you contributing after tax dollars?
In general, the more you can put in tax advantage accounts, the better. It just depends on whether you need the funds to go buy a house or something big.
********
Single: Partial deduction if your MAGI is between $77,000 and $87,000, and no deduction if your MAGI is at least $87,000
Married filing jointly: Full deduction up to your contribution limit if your MAGI is at most $123,000, and partial deduction if your MAGI is between $123,000 – $143,000
Yes, the after tax limit for regular IRA is currently 8k per year at my age and that is what i currently put for me and my wife. As it stands my ratio of pre tax and after tax saving is 60/40 and i was wondering if you would suggest keep saving for IRA but based on your response i guess yes. I meant that i cannot do roth IRA due to my income. Thanks
One aspect that isn’t mentioned is that modifying a 401k plan to allow for after-tax contributions will make a plan subject to top-heavy testing (which is something to be avoided). If the plan fails the top-heavy testing the employer will need to make minimum (3%) contributions to all non-highly highly compensated (>$220k) personnel. This could make this a fairly expensive plan modification that company ownership would not want to make.
Just wanted to put this out there since it otherwise seems like an innocuous ask to make…
Good to know, and sounds like a reason why some employers don’t offer it.
Very happy to see the subject of the Mega Back Door Roth come up here! I recently learned that “IRS rules requires you to withdraw both pre-tax and after- tax dollars proportionally when making a partial withdrawal from a retirement account.” Can you help us understand this potential issue wit the MBDR?
Fascinating. Never heard of this. Even though I don’t have access to this now it’s good to know about for the future if my employer changes. Thanks for highlighting this.
Even if your employer does not allow a mega backdoor one can always contribute after tax dollars to their 401k then when they hit 59.5 do a withdrawal of after tax and roll it into their Roth Account. I did this and it worked out quite nice. Early on I did the regular IRA back door to Roth thus my Roth IRA had been opened for over 5 years when I did the big rollover at 59.5.
Mark or other who know about this. How do we do this. My employer for whatever reason has a max cap of 10%. So the plan has After Tax contributions, but not more than 10% (which make the max overall contribution very less than than the overall max limit allowed for 401K, esp for low/mid level employee). I called the plan administrator, they don’t seem to be know of a way to overcome that 10% limit. If anyone still thinks or knows an option – to contribute to the plan even if the employer restricts, pls comment. I don’t think we can contribute if employer doesn’t support this option.
Don’t forget you can also do a backdoor Roth IRA in addition to the Mega. You just contribute to a Traditional IRA and then do conversion to Roth. You must file form 8606 with your taxes. pretty easy to get around the income limits.
I’ve always liked Roth because the money won’t be considered for your Medicare premiums later on in life, in addition to being tax free. I’ve been contributing to Roth 401(k) for a long time, even though I’m a high earner, and doing back door Roth IRA contributions for my wife who doesn’t work, for a long time. Also, I live in Pennsylvania so regular IRA contributions are still taxable.
This something I’ve been lucky that my current employer has had in its plan document since I started in 2018. I have basically funded it via my YE bonus (paid in feb) and its value as on option has only continued to grow since I am now past 50.
Thankfully one of my first jobs was in the retirement industry and I was able to see many success stories by those that contributed early and consistently across their careers and I’ve been able to duplicate that behavior.