The mega-backdoor Roth is one of the best employee benefits available for high-earning tech professionals planning their financial future.
So if you are looking for answers to questions like…
… then this guide is for you!
This guide is to help you understand the mega-backdoor Roth so that you can save more tax-efficiently and minimize taxes down the road in retirement.
The mega-backdoor Roth strategy involves making after-tax 401(k) contributions and then converting those funds to a Roth IRA or Roth 401(k). This strategy allows high-earners to save more aggressively and tax-efficiently for retirement.
The best way to confirm that your company offers the mega-backdoor Roth is by reviewing your 401(k) plan summary description. The process of reviewing a 30-80 page plan summary description is a bit of a cumbersome task, so if you are unsure, a best practice is to ask your 401(k) plan administrator or financial planner.
Many tech companies offering the mega-backdoor Roth, including: Alphabet (Google), Amazon, Apple, Dell, IBM, Meta (Facebook), Microsoft, Netflix, Oracle, Uber, VMware, and Zoom.
Here’s a more comprehensive list of companies offering the mega-backdoor Roth.
Step 1: Confirm that your 401(k) plan allows for after-tax contributions.
Step 2: Max out your pre-tax or Roth 401(k) elective deferrals.
Step 3: Start with $66,000 ($73,500 if age 50 & older) in 2023 and subtract out $22,500 ($30,000 if age 50 & older) for elective deferrals and your company match. You can contribute up to this amount in after-tax contributions.
Step 4: Contact your 401(k) plan administrator to set-up in-service conversions or in-service distributions. Ideally, your plan allows for this to take place automatically!
Step 5: Elect for after-tax contributions for your 401(k).
In 2023, the defined contribution plan limit is $66,000. The defined contribution plan limit is $73,500 for individuals age 50 & older.
Source: 2023 Important Planning Numbers
After-tax contributions have already been taxed and therefore are nontaxable once the Roth conversion takes place.
Investment earnings on after-tax contributions are taxed at ordinary income rates at the time of the in-service conversion to Roth 401(k) or distribution to Roth IRA. This makes it very important to make sure your plan allows in-service conversions or in-service distributions. One of the best strategies for the mega-backdoor Roth is to confirm automatic in-service conversions.
Investments grow tax-deferred in a Roth IRA or Roth 401(k). Qualified distribution withdrawals during retirement are tax-free from a Roth IRA or 401(k).
Rebecca (60) is a distinguished engineer for Dell. Dell’s 401(k) matches 100% of contributions, up to 6%, up to a maximum of $7,500. Rebecca earns $300,000 per year and wishes to save more for retirement with the mega-backdoor Roth strategy.
Rebecca contributes $30,000 toward pre-tax 401(k) elective deferral plus the 50 & older catch-up. Dell matches $7,500. Rebecca is eligible to save an additional $36,000 in after-tax savings toward the mega-backdoor Roth.
Eric is an executive for Dell. Dell’s 401(k) matches 100% of contributions, up to 6%, up to a maximum of $7,500. Eric earns $250,000 per year and wishes to save more for retirement with the mega-backdoor Roth strategy.
Eric contributes $22,500 toward pre-tax 401(k) elective deferral. Dell matches $7,500. Eric is eligible to save an additional $36,000 in after-tax savings toward the mega-backdoor Roth.