What Is a Mega Backdoor Roth?

A mega backdoor Roth is a retirement savings strategy that lets some workers save far more in a Roth account than the annual Roth IRA contribution limits allow. Unlike a standard backdoor Roth, it uses an eligible workplace 401(k) plan to move after-tax contributions into a Roth account. The strategy can be especially valuable for high-income earners who don’t qualify to contribute directly to a Roth IRA and want to build more tax-free retirement savings.

The benefit of a mega backdoor Roth is that it allows investors to move more retirement savings into a Roth account, where it can grow tax-free and be withdrawn tax-free in retirement if IRS requirements are met. You may be able to use a mega backdoor Roth if you: — Participate in a employer-sponsored 401(k) plan — Your plan allows after-tax employee contributions — Your plan permits in-plan Roth conversions or in-service rollovers to a Roth IRA [READ: 10 Reasons to Save for Retirement in a Roth IRA] From a standard Roth IRA to a mega backdoor Roth, there are multiple ways to save in a Roth account. Understanding how each option works can help you determine which strategy best fits your income and retirement goals.

Roth IRA A Roth IRA allows your investments to grow tax-free, and qualified withdrawals are also tax-free in retirement. Unlike traditional IRAs, Roth IRAs don’t require minimum distributions during your lifetime. There are income limits attached to direct contributions to Roth IRAs, so some higher-income households are unable to contribute directly.

Backdoor Roth A traditional backdoor Roth allows high-income earners to contribute after-tax money to a traditional IRA and then convert those funds to a Roth IRA. While this strategy allows you to work around the Roth IRA income limits, you’re still limited by the annual IRA contribution limit. Mega Backdoor Roth A mega backdoor Roth uses a workplace 401(k) plan to help investors move additional after-tax contributions into a Roth account.

If your employer’s plan allows after-tax contributions and Roth conversions or in-service rollovers, you may be able to save significantly more than the standard 401(k) employee contribution limit by taking advantage of the plan’s higher overall contribution limit. “A mega backdoor Roth can be a powerful retirement planning strategy, especially for high-income earners who have already maximized their traditional …