Mega backdoor Roth conversions can be a 'no brainer' for higher earners, expert says (2024)

FAQs

Is Mega Backdoor Roth still allowed in 2024? ›

The mega backdoor Roth allows you to save a maximum of $69,000 ($76,500 for those 50 and older) in your 401(k) in 2024. How does this add up? The regular 401(k) contribution for 2024 is $23,000 ($30,500 for those 50 and older).

Contribution limits

If you use the mega backdoor Roth strategy, how much you can save is limited by the annual caps on 401(k) contributions. It also depends on how much you have contributed via pre-tax and Roth contributions, and how much your employer has contributed.

For those currently utilizing or considering the Mega Backdoor Roth strategy, there is still time to make contributions for the 2023 and 2024 tax years, even if you don't already have a plan in place. The proposed ban, if enacted, would not take effect until January 1, 2025.

5-Year Rule Applies

Whether you put money into a backdoor Roth or mega-backdoor Roth, the account must be open for five years before you can withdraw both contributions and earnings tax free.

Cons: All or part of a backdoor Roth IRA conversion could be a taxable event. You may have to pay federal, state, and local taxes on converted earnings and deductible contributions. Conversions could kick you into a higher tax bracket for the year.

A backdoor Roth IRA can be a worthwhile investment strategy, especially for high-income earners who exceed the income limits for contributing directly to a Roth IRA. It may not be a promising idea if: Your federal income tax bracket is 32% or higher. You need to withdraw money in five years or less.

The mega backdoor Roth limit changes annually, and it can boost your nest egg with tax-free growth. You'll pay taxes on a portion of your rollover, and the process can lead to penalties if mishandled. The mega backdoor Roth might not always be an option, so taking advantage while you can is key.

Remember MBDR is the act of converting after-tax 401k contributions to Roth, the pretax funds do not get touched. No they are not double taxed. You'd pay tax this year on the pretax portion converted (say you had some after-tax earnings) but then they become Roth funds, so will be tax free in the future when withdrawn.

No, the backdoor Roth is not considered illegal. The IRS does not classify the backdoor Roth as a form of tax evasion but could best be described as a form of tax avoidance. If you have any misgivings about this financial maneuver in a specific situation, you can consult a more experienced tax professional.

Does Vanguard allow Mega Backdoor Roth? ›

If your 401(k) plan allows, you may be able to do a mega backdoor Roth conversion. Some 401(k) plans permit automatic Roth conversions, which means you can make after-tax contributions and have them automatically convert to Roth within their accounts. Check with your plan to see if this option is available to you.

Roth individual retirement accounts offer tax-free growth and other benefits, but some investors earn too much for direct contributions. Higher earners can bypass the income limits with mega backdoor Roth conversions, which shift after-tax 401(k) contributions to a Roth account.

Money that you'll need soon isn't a good candidate for conversion because your assets may not have time to recoup the taxes you would have to pay. You're currently receiving Social Security or Medicare benefits.

Although opening a "backdoor" Roth IRA may sound shady, don't let the name mislead you. It's a totally legal loophole. At its core, a backdoor Roth IRA is a simple conversion: You put money into a traditional IRA or 401(k), then convert it to a Roth IRA.

A conversion can get you into a Roth IRA—even if your income is too high. The conversion would be part of a 2-step process, often referred to as a "backdoor" strategy.

The Roth IRA contribution limit for 2024 is $7,000 for those under 50, and an additional $1,000 catch up contribution for those 50 and older. Source: "401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000," Internal Revenue Service, November 1, 2023.

Highlights of changes for 2024. The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans, as well as the federal government's Thrift Savings Plan is increased to $23,000, up from $22,500. The limit on annual contributions to an IRA increased to $7,000, up from $6,500.

Yes, you can do a Backdoor Roth IRA contribution and a Backdoor Roth conversion every year. The contribution limit for 2024 is $7,000 ($8,000 if you're age 50 or older).

It entirely depends on how your company's 401k plan is set up. In order for a company's employees to be able to get a mega backdoor Roth IRA, it needs to offer two specific things: The company 401k plan must allow after-tax contributions. The company 401k plan must allow Roth conversions on after-tax conversions.