What if my 401k does not allow this (or I don’t have one)?Įither your employer plan allows after-tax contributions or it doesn’t.

Not just the limited “menu” of choices of the 401k provider. Last, by executing the backdoor strategy – you have a much wider array of investment options to choose from. This comes in super handy if you want to continue saving over and above the traditional limits. If using after-tax contributions, the total annual 401k contribution can be as high as $57k (or $63,500 for age 50+). Second, Roth 401k contributions are subject to the contribution limits of $19,500 in 2020 (or $26k if over age 50). Sometimes a plan will offer all three – which are distinctly different – sometimes just one or two of those options are available. All 401k plans allow “pre-tax” contributions, and some allow Roth option and some allow after-tax options as well. While a Roth 401k option does involve after-tax dollars, there are a few key differences.įirst, if your plan offers a Roth 401k option ( around 2 out of 3 do) they may or may not allow a “non-Roth, after-tax” option. This is a question I get a lot, and it is sometimes confusing. Isn’t this the same as my Roth 401k option? In other words, investors would be allowed to direct more assets into a Roth than they otherwise would. If the above two components are allowed, then you should be able to transfer large chunks of your 401k to Roth IRAs. These are two components of a 401k plan that most people do not know about unless you take the time to read the plan documents (or hire an advisor like me to do it for you).

The mega backdoor IRA could be made possible if your retirement plan allows for after-tax contributions and simultaneously allows in-service distributions. So this is a way around it (and yes, it’s legal). You may be aware that if you exceed certain income limits, you will be unable to contribute to a Roth IRA account directly. The “mega backdoor” Roth IRA strategy is where you would contribute indirectly to a Roth IRA via your 401k. The structure itself is pretty straightforward. What is the mega backdoor Roth IRA strategy? This hidden 401k strategy takes things to a whole new level. So if you like the idea of a Roth IRA in the first place, then you will definitely like this supersized version: THE MEGA BACKDOOR ROTH. I’m always looking for ways to get people to fund a Roth IRA. Once in a Roth, funds grow tax-free, withdrawals are tax-free, and there are no required minimum distributions to take. In today’s tax and investment environment, a Roth IRA is a great account to consider.

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