One of the most important questions I am asked by clients (or folks at workshops) is: If I have the capacity to save more, what are some of the vehicles I should use?
The fact is, I love this question!
For high-income earners (and savvy savers) with the capacity to save even more, the Mega Backdoor Roth offers an incredible opportunity to supercharge retirement savings. This strategy allows you to make after-tax contributions to your 401(k) and convert them into a Roth account, enabling significant tax-free growth. Here’s what you need to know about contribution limits, eligibility, and implementation for both 2024 and 2025.
In 2024, when you consider all contribution types, you can contribute a maximum of $69,000 to your 401(k) or $76,500 if you are age 50 or older. This total includes pre-tax, Roth, and after-tax contributions. The regular 401(k) limit is $23,000 (or $30,500 for those 50+), leaving room for up to $46,000 in after-tax contributions, minus any employer match. In 2025, these limits increase to $70,000 (or $77,500 for those 50+). Additionally, individuals aged 60-63 can take advantage of a supercharged catch-up contribution of up to $11,250, allowing them to save a total of $81,250. You can learn more about these limits on the Fidelity Contribution Limits page.1
The Mega Backdoor Roth process is straightforward for those with a qualifying 401(k) plan. First, max out your pre-tax or Roth contributions (up to the IRS limits), then make after-tax contributions up to the overall limit, and finally, convert the after-tax funds to a Roth IRA or Roth 401(k). This can often be done through an in-plan rollover or a direct distribution. If your plan does not allow in-service rollovers, you may need to wait until you leave your job to make the conversion. For more details, visit Fidelity’s Mega Backdoor Roth Guide.
If you are the sole owner of your business, then you may want to work with a Third-Party Administrator (TPA) to prepare the appropriate tax forms. While there are many great TPA options, if you would like to convert your after-tax contributions to your Roth 401k, a company like Ubiquity Retirement may be a great fit to ensure you remain in compliance with government code.
To implement this strategy, your 401(k) plan must allow after-tax contributions and either in-service rollovers to a Roth IRA or in-plan conversions to a Roth 401(k). If your plan doesn’t currently support these options, consider asking your plan administrator or HR department to add them. After-tax contributions must be transferred out of the after-tax bucket as soon as possible to avoid taxable earnings. Once rolled into a Roth account, funds grow tax-free, providing significant long-term benefits. The IRS provides additional guidance on this process in their 401(k) Resource Center.
The Mega Backdoor Roth offers several key benefits, including higher savings potential, tax-free growth, and the ability to avoid required minimum distributions (RMDs) for Roth accounts. It’s ideal for individuals who have maxed out their traditional or Roth 401(k) contributions and still have extra funds to save. However, it’s essential to understand the complexities involved, including IRS nondiscrimination testing and potential plan restrictions.
If you are ready to explore whether the Mega Backdoor Roth is right for you, consult with a financial advisor to ensure proper implementation and alignment with your financial goals. Contact us today to learn more, or explore detailed resources from Fidelity, Schwab, and the IRS.
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