Mega Back Door Roth Options


About the Author Advisor

carrie sax

Carrie Sax, CFA, CFP®

Vice President
Berkeley, California


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All investment strategies have the potential for profit or loss. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. The risk of loss can never be eliminated even if working with a professional.

Roth IRAs are a great way to save for retirement, but eligibility is limited to those under a certain income. If you make too much to qualify for a Roth IRA, a mega back door option for a 401(k) provides an attractive work-around, allowing you to reduce your taxable income during your working years, while avoiding Required Minimum Distributions in retirement. The beauty of a mega back door option is that you can max out your contributions even if your employer match is less than the maximum. In 2023, you could theoretically save as much as $73,500.

Strategies like these are why consulting a financial advisor for retirement planning is so important. Taking advantage of a mega back door option can provide you with significantly more retirement income, in conjunction with good investment management. This option makes sense for those who are maxing out their retirement contributions but still have money to save.


How a Mega Back Door Option Works

There are two buckets to the mega back door option. The first is the employee bucket, which is the percentage of your income you are contributing to your 401(k). The second bucket is the employer bucket, which is the amount of matching contributions they provide.

Employer matches generally range from 3 to 5 percent. Relatively few employers provide a higher match percentage, leaving significant funds on the table that you could potentially be saving for your retirement each year. With a mega back door option, you get access to the employer bucket and have the option of filling in the gap between the maximum that your employer could have contributed and what they actually chose to contribute. In other words, if you have the money, you can contribute the maximum match out of your own funds. These after-tax 401(k) contributions are not deductible.

Let’s look at some concrete numbers to get a better idea of how this works.


401(k) Contributions in 2023

In 2023, for example, the 401(k) contribution limit is $22,500. The catch-up contribution for those aged 50 and up is $7,500. Therefore, someone who is 50 years old in 2023 can contribute $22,500 plus the $7,500 in catch-up contributions, for a total of $30,000. Your employer can additionally contribute up to $43,500 to your account. Most employers, of course, are not going to reach this level of extreme generosity!

Let’s say that instead of the entire $43,500 that they are permitted to contribute, the employer provides a $10,000 match. That leaves $33,500 that is not being funded. Normally, you would have no options for making up this disparity. If a mega back door option is offered, however, you can fund that amount yourself. These are all after-tax contributions, but they can then be rolled right into a Roth 401(k).

For more context, let’s quickly review the difference between a traditional 401(k) and a Roth 401(k).


Traditional 401(k) vs. Roth 401(k)

A traditional 401(k) and a Roth 401(k) differ in how they are taxed. A standard 401(k) is funded via pre-tax contributions, which also lowers your taxable income. However, once you start making withdrawals, you must pay taxes on those funds. A Roth 401(k) or Roth IRA is taxed when you make contributions. These amounts don’t lower your taxable income, but when you make withdrawals after retirement, you pay no tax.


Is a Mega Back Door the Right Option?

Not all employers offer a mega back door Roth, but if your employer does, it’s a good option. The plan must allow you to make after-tax contributions to your 401(k). The plan must also permit in-service distributions while you still work, so you can take after-tax contributions out of the 401(k) and transfer them to a Roth account. This either takes the form of a conversion of the standard 401(k) to a Roth 401(k) or the ability to roll the funds into a Roth IRA.

A mega back door Roth option is complicated, so before embarking, it's best to get the counsel of a financial professional.

If you would like more information about creating a financial plan for your retirement, contact a financial advisor at EP Wealth Advisors today.



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