Roth accoun☂ts allow investo𓆏rs to set aside after-tax dollars to grow toward retirement, but there are limits on who may utilize these retirement plans.

For example, in 2025, single filers making $165,000 or more and married taxpayers filing jointly making $246,000 or more were ineligible to contribute to a Roth IRA. To get around this, high-income filers can use a bypass strategy known as a mega backdoor Roth.

What Is the Mega Backdoor Roth Strategy?

A mega backdoor Roth strategy allows retirement savers otherwise ineligible for Roth IRA or Roth 401(k) accounts—typically due to exceeding income limits—to transfer certain types of traditional 401(k) contributions into one of these accounts.

Understanding the Mega Backdoor Roth Strategy

Rollovers allow retirement savers to transfer some or all of the savings from one account to another; a conversion is a rollover that moves savings from a traditional account to a Roth account.

A mega backdoor Roth conversion can provide high-income savers access to tax-free growth in accounts. The strategy involves contributing after-tax savings to your 401(k) and then converting those savings to a Roth 401(k) 𝕴or a Roth IRA. 

For those able to max after-tax contributions over and above the limit, it’s also essential to know whether a plan allows the Roth conversion. A retirement plan must allow for in-service distributions of post-tax contributions to make the conversion𝐆, and only a small fraction of 401(k) plans do so.

Step-🍌by-Step Process of a Mega Backdo🍸or Roth Conversion

Step 1: Making After-Tax Contributions

Begin by making after-tax contributions to a traditional 401(k) account. Many a✨ccounts allow investors to make after-tax contributions from paychecks before reaching the maximum annual pre-tax contribution limit, but others require that this limit be reached first. Contributions for a Roth conversion must include after-tax dollars because converting them may not require paying additional taxes on the principal.

Step 2: Conversion to Roth Accounts

Next, convert the after-tax contributions to either a Roth IRA or a Roth 401(k). This may be possible through an in-plan conversion to𝓰 another account offered by an employer, or it may require rolling these contributions to a new Roth account. 

The conversion has tax implications—most investors will need to pay taxes on any earnings included during𒅌 the conversion. This is why consulting with a tax professional before executing the mega backdoor Roth strategy is essential.

🎉 Benefits and Drawbacks of the Mega Backdoor Roth

Setting Up a Mega Backdoor Roth

A traditional 401(k) plan offered through an employer must typically 澳洲幸运5开奖号码历史查询:allow for in-plan conversions in order for a mega backdoor 🍬Roth conversion to be possible.

A backdoor Roth conversion can be a complex process that may expose the retirement saver to unanticipated tax liabilities. This is why it’s always helpꦯful to consult with a finance professional or tax adviser prior to beginning the conversion process.

Tax Implications and Considerations

After-tax contributions to a traditional 401(k), beyond the limit of pre-tax contributions, are not taxed upon withdrawal. However, the earnings on those contributions are taxed upon disbursement. There is, therefore, incentive for investors to co▨nvert those post-tax contributions to a Roth account for the tax benefits it offers upon withdrawal.

To maximize benefits, some investors time their convers𒈔ions to coincide with tax years in which their income is lower and they are in a lower tax bracket. Converting during a market downturn, when the price of assets is lower, can also help to offset the tax liability on the converted funds.

The Bottom Line

High-income individuals seeking to increase retirement savings might consider a mega backdoor Roth conversion. By maximizing after-tax contributions to a traditional 401(k) account, these savers have the potential to convert those funds to a Roth IRA or Roth 401(k), thus boosting their tax-free growth potential. However, there are possible tax implications to keep in mind, and only some 401(k) plans allow this type of conversion, so it’s best to consult with a tax professional to determine if this is a viable option.