Mega Backdoor Roth: How After-Tax 401(k) Contributions Work

Greetings!

Mega Back Door Roth, what is it?

You may have heard of the terribly coined term "back door Roth IRA" Less common is the mega back door Roth.

Essentially the back door Roth IRA is for high income earners that cannot make a direct contribution to a Roth IRA. They must put the money in a Traditional IRA first before converting to a Roth IRA.

Quick note: do not do a back door Roth IRA if you have money in a Traditional IRA, it will be taxed.

The Mega back door roth has worked for those who are W2 employees but also have self employment 1099 income.

It can also work for those who are strictly W2 employees that have 401ks that allow for after-tax contributions and in-plan conversions or potentially out of plan conversions as well.

I will break down both:

W2 income only

If your 401k plan has the following, you will be eligible for a mega back door Roth.

after tax contributions in-plan automatic conversions to Roth 401k

2024 the max contribution you can make as an employee is $23,000/year. Let's assume your employer matches another $17,000 so you have a total of $40,000 contributed to your 401k.

The limit for 2024 is $69,000 of total contributions to a 401k plan.

This leaves room for another $29,000 that can be completed as an after-tax contribution.

Within your 401k, you will set up after-tax contributions and ideally there is an option to where these after tax contributions are automatically converted to the Roth 401k.

If not, you could still potentially roll these after-tax contributions to a Roth IRA if the plan allows for "out of plan" conversions/distributions.

You have just completed the mega back door Roth by adding another $29,000 to your Roth accounts for the year.

W2 Income + Self Employment Income

2024 the max contribution you can make as an employee is $23,000/year. Let's assume your employer matches so you take advantage of contributing the $23,000/year into your W2 401k.

For your self-employment income you can potentially set up a Solo 401k and make contributions to this via your 1099 self employment income.

The max limit for employee contributions is $23,000 amongst all of your plans. So you cannot put another $23,000 into your Solo 401k if you already put $23,000 into your W2 401k.

What you can do is make "employer" contributions to your Solo 401k which typically comes out to 20% of your profit from your self-employment income.

For example: $100,000 profit 20% contribution = $20,000 as a pre-tax employer contribution

The total limit for 2024 is $69,000 per plan. Therefore you can make an "after-tax" contribution of $49,000 to your solo 401k- and then convert that to your Roth IRA.

You have just completed the mega-back door Roth IRA as you were able to stash away $49,000 into your Roth IRA (which is typically limited to only $7,000/year for 2024).

Quick note: You can still do your regular back door Roth IRA of $7,000 on top of this.