Supercharge your retirement plan contributions with the mega backdoor Roth strategy

Author

Edward Jones - Chris Scanlan

Posted on

Nov 04, 2024

Book/Edition

Florida - Southwest

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One of the drawbacks of some types of retirement accounts, such as Roth IRAs, is the relatively low contribution limits permitted by the IRS. However, there are tools that can help you save more for retirement while minimizing your tax burden in retirement. The mega backdoor Roth is one such tool that may help you increase the amount of tax-free assets you save for retirement.

What is the mega backdoor Roth strategy?

Similar in concept to the Backdoor Roth IRA strategy, the mega backdoor Roth (MBD Roth) is a way for those with an employer-sponsored retirement plan (e.g., a 401(k) or 403(b) plan) to potentially save more tax-free funds than the employee elective deferral limits ($23,000 in 2024).  

To implement this strategy, an investor makes an after-tax contribution to their employer retirement plan and then converts it to a designated Roth account within the plan or rolls it into a Roth IRA. Depending on the details of your plan, you may be able to contribute up to $46,000 above the 2024 elective deferral limit by pursuing this strategy. It’s important to note that not all plans allow employees to make after-tax contributions, which eliminates the ability to pursue the mega backdoor Roth strategy.

When converted, these funds also gain the other benefits of a Roth account, including no required minimum distributions (RMDs), a tax-free asset for your heirs and potential access to tax- and penalty-free contributions before retirement.

How do you execute a mega backdoor Roth strategy?

There are generally two ways to execute the MBD Roth: an in-plan Roth conversion and an in-service distribution. Depending on the features of your plan, you may have one, both or neither of these methods available to you. As such, it’s important to review your plan’s Summary Plan Description and talk with your plan administrator, whose contact information is typically on quarterly statements, to determine which options may be available to you. 

  • In-plan Roth conversion: With an in-plan Roth conversion (or an in-plan Roth rollover), you convert your after-tax contributions (and any earnings generated on them) to a designated Roth account within your employer plan (often referred to as a Roth 401(k)). If your after-tax funds generated earnings, you’ll owe taxes on these amounts in the year you convert them.  
  • In-service distribution: An in-service distribution is different because this method moves funds out of your 401(k) and into your IRA(s). To do this, you distribute the funds and roll them over to your Roth IRA. While you can send your entire distribution to your Roth IRA, you can also direct pretax and after-tax amounts to different IRAs. So, you can convert your after-tax contributions to a Roth IRA and send pretax amounts to a traditional IRA, which can be helpful when it comes to managing taxes with your strategy.  

How do you manage the taxes with the mega backdoor Roth?

When after-tax funds are converted or distributed from a 401(k), they consist of both after-tax contributions and pretax amounts. This is similar to the pro rata rule for traditional IRAs. Depending on whether your employer separately accounts for your after-tax amounts, the taxable and nontaxable portions of the distribution could be larger or smaller.

As a result, it’s important to talk with your financial advisor and tax professional about ways to manage the taxes with the strategy. Strategies for managing your taxes with the mega backdoor Roth may include the timing of when you roll over or convert the after-tax contributions and separating pretax amounts from the after-tax contributions. 

Will the mega backdoor Roth strategy always be available? There’s no guarantee the mega backdoor Roth strategy will always be available. Congress recently considered legislation that would have eliminated this strategy. As of now, the mega backdoor Roth is still around, but no one can predict its future.

The mega backdoor Roth strategy can be beneficial for investors but can easily become very complicated. As such, it’s important to discuss this strategy with your financial advisor to determine if it is right for you and, if so, how to go about implementing it.


Supercharge your retirement plan contributions with the mega backdoor Roth strategy

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Edward Jones - Chris Scanlan View Details

Edward Jones - Chris Scanlan

Financial Advisor

Quite simply, you are my priority. My favorite part of being a financial advisor is getting to know each client on a personal level. Your story, your values, your concerns and your personal goals are just as important to me as your financial goals. Uncovering what is important to you paves the way to building an incredible financial strategy that incorporates every aspect of who you are and what you are seeking to achieve. I work together with my clients by listening to what is truly important to them and using an established process to discover together which strategies and tools will work best for your unique circumstances.Another reason why I work so hard to understand my client's needs is my experience as a father of five and husband to my wife, Ann. I have four boys and one girl: Declan (7), Vaelen (5), Kylian (4) and Lochlann (2). We also added a princess to our rowdy crew, Ailis, in June of 2022. More than ever, I understand that health, safety and security will always be a top priority to my clients just as it is for me. The same care, attention, mindfulness and dedication required as a parent has shaped the way I approach my role as your financial advisor. So, whether it's planning for retirement, saving for education or just trying to protect the financial future of the ones you care for the most, we can work together to develop specific strategies to help you achieve your goals.As a former collegiate athlete for Ave Maria University, I understand the importance of teamwork and being able to rely on those to around you to overcome challenges. Our partnership, the flexibility to work alongside your attorney, accountant and other trusted professionals and the resources at Edward Jones will ensure you receive the most current and comprehensive guidance to make sure you're given everything you need to be confident in your financial strategy.I love what I do, and I'm blessed to be in a role where I can have such a positive impact on my clients' lives and my community!

Edward Jones - Chris Scanlan View Details

Edward Jones - Chris Scanlan

Long Term Care Insurance

Quite simply, you are my priority. My favorite part of being a financial advisor is getting to know each client on a personal level. Your story, your values, your concerns and your personal goals are just as important to me as your financial goals. Uncovering what is important to you paves the way to building an incredible financial strategy that incorporates every aspect of who you are and what you are seeking to achieve. I work together with my clients by listening to what is truly important to them and using an established process to discover together which strategies and tools will work best for your unique circumstances.Another reason why I work so hard to understand my client's needs is my experience as a father of five and husband to my wife, Ann. I have four boys and one girl: Declan (7), Vaelen (5), Kylian (4) and Lochlann (2). We also added a princess to our rowdy crew, Ailis, in June of 2022. More than ever, I understand that health, safety and security will always be a top priority to my clients just as it is for me. The same care, attention, mindfulness and dedication required as a parent has shaped the way I approach my role as your financial advisor. So, whether it's planning for retirement, saving for education or just trying to protect the financial future of the ones you care for the most, we can work together to develop specific strategies to help you achieve your goals.As a former collegiate athlete for Ave Maria University, I understand the importance of teamwork and being able to rely on those to around you to overcome challenges. Our partnership, the flexibility to work alongside your attorney, accountant and other trusted professionals and the resources at Edward Jones will ensure you receive the most current and comprehensive guidance to make sure you're given everything you need to be confident in your financial strategy.I love what I do, and I'm blessed to be in a role where I can have such a positive impact on my clients' lives and my community!

Edward Jones - Chris Scanlan View Details

Edward Jones - Chris Scanlan

Financial Services

Quite simply, you are my priority. My favorite part of being a financial advisor is getting to know each client on a personal level. Your story, your values, your concerns and your personal goals are just as important to me as your financial goals. Uncovering what is important to you paves the way to building an incredible financial strategy that incorporates every aspect of who you are and what you are seeking to achieve. I work together with my clients by listening to what is truly important to them and using an established process to discover together which strategies and tools will work best for your unique circumstances.Another reason why I work so hard to understand my client's needs is my experience as a father of five and husband to my wife, Ann. I have four boys and one girl: Declan (7), Vaelen (5), Kylian (4) and Lochlann (2). We also added a princess to our rowdy crew, Ailis, in June of 2022. More than ever, I understand that health, safety and security will always be a top priority to my clients just as it is for me. The same care, attention, mindfulness and dedication required as a parent has shaped the way I approach my role as your financial advisor. So, whether it's planning for retirement, saving for education or just trying to protect the financial future of the ones you care for the most, we can work together to develop specific strategies to help you achieve your goals.As a former collegiate athlete for Ave Maria University, I understand the importance of teamwork and being able to rely on those to around you to overcome challenges. Our partnership, the flexibility to work alongside your attorney, accountant and other trusted professionals and the resources at Edward Jones will ensure you receive the most current and comprehensive guidance to make sure you're given everything you need to be confident in your financial strategy.I love what I do, and I'm blessed to be in a role where I can have such a positive impact on my clients' lives and my community!

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