In 2023, you can contribute up to $66,000 if you’re under 50 and $73,500 if you’re 50 or older to your 401(k) using the Mega Backdoor Roth provision. Employees at Microsoft, Amazon, Meta, Nike, Intel, and many other tech companies have access to this benefit.

The Mega Backdoor Roth enables you to contribute thousands in after-tax dollars and convert those dollars to Roth. This benefit is sometimes referred to as the after-tax Roth conversion within your 401(k).

00:00 Introduction
00:14 Companies that offer the Mega Backdoor Roth
00:26 Mega Backdoor Roth example

If you’re on track to max out your 401(k), this is a benefit worth leveraging. 401(k) contributions increased in 2023. If you’re under 50 you can contribute up to $22,500 and if you’re 50 or older you can contribute up to $30,000. The Mega Backdoor Roth allows you to contribute additional after-tax dollars up to the federal limit.

The Mega Backdoor Roth gives high-income earners access to benefits associated with a Roth. Within a Roth your money grows tax-free. These same dollars, and the growth, are tax-free when accessed in retirement (59.5+ years old).

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How does the Mega Backdoor Roth work?

We will walk through an example for someone under 50 years old who receives a 50% employer match on their 401(k) contribution:

• Employee contributes $22,500
• Employer match: $11,250
• Employee after-tax contribution: $32,250

Our example employee can contribute up to the federal limit of $66,000. This means they can contribute $32,250 in after-tax dollars and convert those dollars to Roth.

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Third Party: Avier Wealth Advisors is not affiliated with any organizations mentioned in this video. There is no guarantee that the information we have provided is accurate. Employees are encouraged to contact their employer should they have any questions regarding their employee benefits.

Taxes: Avier Wealth Advisors does not prepare taxes. The tax ideas presented are meant to demonstrate general concepts rather than precise calculations. We consult with your tax professional for exact calculations….(read more)

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How Does a Mega Backdoor Roth Work? 2023 Updates

A Roth IRA is a popular retirement saving vehicle that offers tax-free growth and tax-free withdrawals in retirement. However, the annual contribution limit for a Roth IRA is relatively low, which can limit higher-income individuals from fully taking advantage of its benefits. This is where the concept of a “mega backdoor Roth” comes into play.

The mega backdoor Roth is a strategy that allows individuals with high incomes to contribute significantly more money to a Roth IRA than the standard contribution limit. It is an advanced retirement planning technique that can provide additional opportunities for tax-free growth and potentially increase retirement savings.

To understand how a mega backdoor Roth works, let’s break down the process into a few key steps:

1. Max out your 401(k) contributions: The first step is to contribute the maximum amount allowed to your employer-sponsored 401(k) plan, which is $20,500 for individuals under 50 in 2023 ($27,000 for individuals 50 and older). By doing so, you are taking full advantage of the tax benefits offered by a traditional 401(k).

2. Check if your 401(k) plan allows after-tax contributions: Not all employer-sponsored plans allow after-tax contributions, so it’s important to check if your plan offers this option. If it does, you’re one step closer to executing the mega backdoor Roth strategy.

3. Make after-tax contributions: If your 401(k) plan allows after-tax contributions, you can contribute additional money to the plan after you’ve reached the annual limit for pre-tax contributions ($20,500 or $27,000 depending on your age). The IRS sets the overall contribution limit for 2023 at $61,000 ($64,500 for individuals 50 and older). This means that if you’ve contributed $20,500 to your 401(k) pre-tax, you could potentially contribute $40,500 in after-tax contributions ($44,000 for individuals 50 and older).

4. Convert after-tax contributions to a Roth IRA: The key step in executing the mega backdoor Roth strategy is converting your after-tax contributions into a Roth IRA. This can typically be done through an in-service withdrawal or rollover option offered by your 401(k) plan. By doing so, you effectively move the after-tax contributions into a Roth IRA, where they can grow tax-free and be withdrawn tax-free in retirement.

5. Pay attention to tax implications: It’s important to note that the conversion of after-tax contributions to a Roth IRA may trigger tax liabilities. Any pre-tax earnings on the after-tax contributions will be subject to income taxes at the time of conversion. However, the after-tax contributions themselves are not subject to taxes as they were already made with after-tax dollars.

The mega backdoor Roth strategy allows individuals with high incomes and access to after-tax contributions in their 401(k) plans to save significantly more for retirement in a tax-free manner. By leveraging this strategy, individuals can potentially accumulate larger retirement savings and enjoy the flexibility of tax-free withdrawals in retirement.

Although the basic concept of a mega backdoor Roth remains unchanged, it’s important to stay updated on any updates or changes in the tax laws that might impact the strategy. Speak with a financial advisor or tax professional to ensure you are following the latest rules and regulations when implementing a mega backdoor Roth strategy in 2023.