Couple looking at papers at kitchen table

The Mega-Backdoor Roth

Are you looking for a strategy that will allow you to create more tax diversification in retirement and fund a Roth IRA with amounts in excess of your annual
contributions? For 2022, Roth IRA contributions are limited to $6,000 ($7,000 if age 50 or older) and Roth qualified plan salary deferral contributions are
limited to $20,500 ($27,000 if age 50 or older). If you’re looking to sock away more Roth dollars over and above the Roth IRA and/or Roth qualified plan
salary deferral limits, you may be able to do so by executing the mega-backdoor Roth strategy.


In order to be eligible for the mega-backdoor Roth, your employer-sponsored qualified plan must allow for after-tax contributions and in-service
withdrawals or in-plan conversions. The strategy is a two-step approach:

1. Make an after-tax contribution to your qualified plan
2. Roll the after-tax contribution to a Roth IRA or convert the after-tax contribution to a Roth qualified plan

Benefits

  • Tax-free growth; tax-free earnings after five years and age 59½
  • Hedge against future tax rate hikes
  • No income limits for after-tax contribution eligibility (unlike a Roth IRA)

Considerations

  • Must be eligible for a qualified plan with after-tax contributions
  • Following a conversion, Roth qualified plan assets may not be available until a triggering event occurs
  • After-tax contributions by certain employees may force the qualified plan to fail actual contribution percentage (ACP) testing

Mega-Backdoor-Roth-chart.png

Hypothetical Example (See Diagram)

401(k) Employee Contributions:

  • $20,500 pre-tax salary deferrals
  • $39,500 after-tax contributions

401(k) Employer Contribution:

  • $1,000 match

Total between all employee and employer contributions cannot exceed $61,000 ($67,500 if age 50 or older) for 2022.

Roll after-tax contributions of $39,500 to a Roth IRA or convert to a Roth 401(k); future Roth earnings will be tax-free after five years and age 59½.

Upon a triggering event like separation from service, roll pre-tax salary deferrals and employer contributions to a traditional IRA.

If you’re not utilizing the mega-backdoor Roth strategy, you may be missing out on an exceptional opportunity. As a plan sponsor, consider amending your plan document to allow for after-tax contributions. As a plan participant, reach out to your company’s benefits specialist to discuss your after-tax contribution options.

Contact a Stifel Financial Advisor today to review your qualified plan funding options.
It is always recommended that you seek the aid of a competent tax advisor or accountant to assist with tax advice and guidance.

0122.4098516.1