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In the planning department, many of our conversations with clients is about determining savings goals on an annual basis that will help propel them to their retirement planning goals discussed. For many clients, that starts with taking advantage of their company retirement plans and working to maximize their contributions, and then more detailed planning follows suit with establishing other savings vehicles such as a Roth IRA or taxable brokerage account for excess savings ability. In recent years, we’ve had several clients that have been able to tuck away significantly more funds into their retirement savings accounts by taking advantage of what is called the Mega Backdoor Roth strategy within certain company 401(k) plans. Microsoft has been leading the way with this feature, with companies such as Amazon, Snapchat, Google, and Salesforce quickly following suit. This may be a new concept for most so, we will answer the following pertinent questions– what a Mega Backdoor Roth is, how does it work, and who could consider taking advantage of this strategy.

What is it?

The Mega Backdoor Roth is an option within certain companies’ 401(k) plans that utilizes an after-tax Roth conversion to tuck away more funds into the company retirement plan. Within a 401(k), there are typically two buckets of funds: pre-tax funds, where you can deduct your contributions from your gross salary, allow contributions and earnings to grow-tax free, and then pay ordinary income tax once you start drawing from it during retirement; or Roth funds, where you contribute non-deductible after-tax funds from your net salary, allow contributions and earnings to grow tax-free, and reap the benefits of accessing the account tax-free after 59 ½.  Both buckets of funds (pre-tax and Roth) have different advantages and having both buckets to draw from creates diversification of your retirement income and allow for maximum optionality, flexibility, and tax management during your retirement years.  The plans that allow for a Mega Backdoor Roth strategy to work, have a third bucket of funds: after-tax, which allow for employees to make after-tax contributions and convert these funds to Roth immediately after contributing.

The Roth option has been increasingly enticing for many clients in recent years due to advantage of allowing funds to both grow tax-free and be withdrawn tax free beyond 59 ½ (some exceptions apply). If we compare this to a taxable account: all dividends, interest, and capital gains are taxable in the year they occur, which can drag down performance over the years. The Roth funds within an IRA are also free from the required minimum distribution (RMD) rules the pre-tax funds would be subject to at 72 years old. For many clients with a long-time horizon until retirement and/or in a lower tax bracket than anticipated in retirement, this is a major advantage for their retirement savings.

There are a few ways to fund a Roth: through a Roth IRA, a Backdoor Roth, or a Mega Backdoor Roth. All have their own rules and guidelines, but the Mega Backdoor Roth allows for significantly more contributions than the other two. The Roth IRA allows for a $6,000 maximum contribution ($7,000 if you’re over 50) in any given year but is hamstrung by income limitations that prohibit high income earners from contributing. The Backdoor Roth is a way to bypass the income limits by allowing high income earners to contribute to a Traditional IRA and then immediately converting the Roth funds and paying ordinary income tax on the conversion, but this will also be limited to the $6,000 or $7,000 contribution in addition to having to be conscious of the pro-rata rules. The Mega Backdoor Roth, however, allows people (who work for companies that allow it) to save up to an additional $38,500 in 2021 in a Roth by making after-tax contributions in your 401(k) and then rolling it over to the Roth 401(k) within the plan. This is where the Mega Backdoor Roth becomes an increasingly attractive way to save for retirement as there is no income limit for being able to make Roth contributions and provides the ability to save over six times as much as much as the other Roth options.

How does it work?

Let’s take Jim and Suzie Mackenzie:  Jim is under 50 years old making $150,000 maxing out his retirement plan at work ($19,500 in 2021) that matches 50% of his contribution ($9,750); Suzie is over 50 years old making the same income, maxing out her plan ($26,000 with the catch-up provision) and same 50% employer match on the employee contribution excluding the catch-up provision ($9,750). Based on the 2021 401(k) federal limit, since Jim is under 50, a total of $58,000 can be contributed within his 401(k) in 2021 between the employee and the employer contributions. Since Suzie is over 50, a total of $64,500 can be contributed within her 401(k) in 2021 between employee and employer contributions. In both cases, there is a remaining $28,750 that can be contributed in each of their accounts to reach the maximum dollar amount in 2021. Because their respective 401(k) plans allow for the Mega Backdoor Roth conversion, both Jim and Suzie can contribute the additional $28,750 after-tax into their 401(k)s and immediately convert those funds to Roth funds within their respective 401(k)s. By utilizing the Mega Backdoor Roth conversion, Jim would be able to save $48,250 (~32% of his income) in 2021 for retirement in a tax-advantaged way and Suzie could contribute $54,750 (~36% of her income) in 2021 for retirement in a tax-advantaged way. Without the Mega Backdoor Roth option, Jim and Suzie would only be able to save ~13% and ~17% respectively into their company retirement plans. This would be a significant benefit for high-income earners looking to maximize their retirement savings.

Who should consider this?

The first course of action is to determine your retirement savings ability. As a rule of thumb, your company retirement plan is the first place to save for your retirement and especially if your employer offers a 401(k) plan that matches a portion of your contributions— take advantage. The match serves as a way to get you some free money towards retirement, and hey who doesn’t like free money?  If you determine you have retirement savings ability beyond the $19,500 traditional 401(k) contribution ($26,000 over 50) you make, then the Mega Backdoor Roth conversion may be a great option for you.

Once you determine your savings ability for retirement, the next course of action is to determine whether your company retirement plan allows for a Mega Backdoor Roth conversion by having an after-tax option that allows for in-service withdrawals of these funds to be converted to Roth. We’d advise you to check with your human resources team or plan administrator to help you determine if this is an option for you. If your employer plan does not provide this feature, do not fret but it may be worth bringing to your employer’s attention to see if this is a benefit they are considering. Regardless, continued savings is paramount to building a successful retirement and longevity of assets.

If this retirement option is something you’d like to consider, please reach out to us and we would be happy to discuss if this makes sense for you given your goals and objectives as well as walk you through the steps to complete this process. Please feel free to pass on to any friend, family, or colleague who may benefit from reading more about this feature. And, as always, please let us know if there are any questions- we’d love to be a resource for you.



I am in the business of helping people always; whether that be in my relationships or my career. I value serving others and there is no greater joy than looking into someone’s eyes and knowing I served them well. I was drawn to this field because of my desire to come alongside people, learn about what is most important to them, and then diligently working to help those goals come into fruition.