High-income earners shut out of traditional Roth IRA contributions due to income limits now have a workaround that can move substantial sums into tax-free retirement accounts. The mega backdoor Roth strategy leverages employer 401(k) plans to bypass income restrictions entirely.
Here's how it works. The IRS caps Roth IRA contributions at $7,000 annually for those under 50 in 2024, but phases out eligibility once income hits $146,000 to $161,000 for single filers and $230,000 to $240,000 for married couples. A mega backdoor Roth circumvents these limits by using your employer's 401(k) plan.
Most 401(k) plans allow nonelective after-tax contributions beyond the standard $23,500 annual limit (or $31,000 with catch-up contributions for those 50 and older). If your plan permits it, you contribute after-tax dollars up to the plan's total employee deferral limit, currently $69,000 annually. You then request an in-service distribution and roll that money directly into a Roth IRA, converting after-tax contributions into tax-free growth.
The advantage is substantial. Where a normal backdoor Roth limits you to $7,000 yearly, a mega backdoor Roth potentially adds $46,000 more annually for 2024. That money grows tax-free forever, and you face no required minimum distributions in retirement.
The catch: Your employer must offer a plan that permits nonelective after-tax contributions and in-service distributions. Not all 401(k) administrators allow this feature. You'll also owe taxes on any investment gains between contribution and conversion. Pro-rata rules apply if you hold pre-tax IRA balances,