Let’s talk about the Mega Backdoor Roth! Note that only some employers allow for this as it’s 1) more expensive 2) more complex 3) more overhead in general 4) targeted towards higher earners only

Pleasantly surprising, United Airlines has this baked into our Fidelity 401(k) plan, which I, despite being a bit too low-earning to fully take advantage of it, will try it out.

What is a Mega Backdoor Roth? So, this is a retirement strategy that comprises of two features inside a 401(k) plan to get tens of thousands more dollars into Roth status (meaning it can grow tax-free FOREVER!), far beyond the traditional ~$7k Roth IRA limit.

Those two features, which again may not be available for all 401(k) plans, are after-tax 401(k) contributions and Roth in-plan conversion. The former is a third contribution type after traditional pre-tax and Roth. The latter is the ability to roll this after-tax money out to a Roth IRA while still employed. With both, one can execute the Mega Backdoor Roth.

A 2022 report by Plan Sponsor Council of America found that only 21% of 401(k) plans allow after-tax contributions, and that’s only one of two mechanisms needed for this to work. I’d guess only 10-15% of 401(k) plans fully enable this strategy.

IRS Limits So, let’s talk about limits. 401(k) contributions are known to have a ~$23,500 cap. However, that only applies to pre-tax and Roth 401(k) contributions only. There’s actually a further limit of ~$69,000 which includes pre-tax and Roth, as well as employer match and after-tax! This means you can contribute after-tax contributions to your 401(k) even after meeting the $23,500 pre-tax and Roth cap. You don’t necessarily have to wait until you reach that $23,500 cap to start doing after-tax contribution. It’s just that it’s best to fully take advantage of the $23,500 pre-tax/Roth contributions first as it is the most tax-efficient and allows for essentially free money w/ employer match. I personally plan to do a percentage for pre-tax and after-tax on each paycheck for now as to not need a mid-year manual adjustment. Fidelity also helps cut the contributions off if they are set to go over the limits, which further reduces needed headspace.

Flow Paycheck → After-tax 401(k) → Roth in-plan conversion (inside 401(k) plan) → Grows tax-free as Roth 401(k) → Leave employer → Rollover Roth 401(k) to personal Roth IRA (no deadline, but never hurts to do it sooner than later) → No RMDs, Lifetime Tax-Free Growth

Summary Even among the financially-literate, many think the annual Roth contribution limit is strictly capped at ~$7,000. But inside certain 401(k) plans, this Mega Backdoor Roth strategy allows the conversion of up to $40,000+ per year into Roth status… tax-free forever. It’s lowkey ridiculous, but hey, enjoy it while it lasts. As for me, I do not get paid enough yet to fully partake in it, but that’s a me problem, not a you problem :D