Uncovering the Concealed Entrance to a Mega Roth IRA: Its Nature and Utilization
High-income earners, particularly those with an annual income exceeding certain thresholds, may find themselves restricted from contributing directly to a Roth IRA due to income limitations. However, there's a workaround known as the "mega backdoor Roth IRA." This strategy allows high earners to surpass the $7,000 or $8,000 contribution limit for individuals over 50 in the 2024 and 2025 tax years.
What is a mega backdoor Roth IRA?
High-income earners are often barred from making Roth IRA contributions. This restriction applies to singles or heads of household earning an annual income of $165,000 or more in 2025, up from $161,000 in 2024. For married filing jointly, the income ceiling is $246,000 in 2025, an increase from $240,000 in 2024.
The backdoor Roth IRA serves as a loophole. High-earners can contribute funds to a non-deductible traditional IRA and subsequently convert them into a Roth IRA. The mega backdoor Roth IRA leverages a similar conversion method, but significantly reduces or eliminates the conversion's tax liability.
Determining Eligibility
Here are the factors to consider to determine if you're eligible for a mega backdoor Roth IRA:
- Your filing status is single or head of household with an annual income exceeding $165,000 in 2025 (or $161,000 in 2024). For married couples filing jointly, the income limit is $246,000 in 2025 (or $240,000 in 2024).
- You maximize your employer's annual 401(k), 403(b) or 457 plan, or solo 401(k) contributions. The pre-tax contribution limits are $23,500 in 2025 ($31,000 if you're aged 50-59 or 64 or older, or $34,250 if you're 60-63). The limits increased from $23,000 ($30,500 if you're 50 or older) in 2024.
- You maximize your annual, non-deductible traditional IRA contributions of $7,000 ($8,000 if you're 50 or older) in 2024 and 2025.
- You make optional additional after-tax contributions over and above the annual 401(k) limit. The limits are $23,000 (or $30,500 for ages 50 and up) in 2024 and $23,500 (or $31,000 for ages 50-59 and 64 and up, or $34,250 for those ages 60-63) in 2025.
- Your employer's retirement plan permits in-service distributions of these after-tax contributions. Alternatively, you may choose this option if you anticipate leaving your job soon and intend to make a rollover to a Roth IRA.
Creating a Mega Backdoor Roth IRA
How to Create a Mega Backdoor Roth IRA
To implement the mega backdoor Roth IRA strategy, prioritize maximizing other retirement savings options first. In 2024, ensure you contribute the maximum pre-tax $23,000 ($30,500 if you're older than 50) annually to your 401(k). For 2025, contribute at least $23,500 ($31,000 if you're 50-59 or 64 or older, or $34,250 if you're 60-63). Consult your company's HR department for assistance with this.
Second, make the maximum annual, non-deductible traditional IRA contribution of $7,000 ($8,000 if you're 50 or older) for 2024 and 2025. Ensure you have a Roth IRA account as well. You can easily open either type of account with most brokers if you don't already have both.
Next, begin making after-tax 401(k) contributions, which differ from Roth 401(k) contributions. Once prepared, contact your 401(k) service provider to execute an in-service distribution of your after-tax contributions into your Roth IRA.
Alternatively, if you're unable to perform in-service distributions, you can still contribute after-tax funds to your 401(k) and move those funds to your Roth IRA when you leave your job.
- For 2025, the total 401(k) contributions (pre-tax, after-tax, employer matching contributions, and any other non-elective employer contributions) are capped at $70,000 for all individuals, a rise from $69,000 for 2024. For individuals aged 50 or older, the limit is $76,500 in 2024. In 2025, individuals aged 50-59 or 64 or older, can contribute up to $77,500 or $81,250 respectively.
- Subtract the pre-tax contribution you make from the annual max 401(k) contribution limit. For instance, you would subtract $23,500 from $70,000 in 2025 to obtain the maximum mega backdoor Roth IRA contribution of $46,500 in 2025, assuming your employer makes no 401(k) contributions on your behalf.
- If your employer makes matching 401(k) contributions, subtract that amount as well. For example, if you earn $200,000 per year and your employer makes a 3% match, subtract the additional $6,000 in matching contribution ($200,000 x 0.03), leaving a maximum mega backdoor Roth IRA limit of $40,500 in 2025.
Taxes
Mega backdoor Roth IRA taxes
A regular backdoor Roth IRA conversion requires paying income taxes on the amount of money converted to a Roth IRA, based on the deductibility of your traditional IRA holdings. Similarly, with a mega backdoor Roth IRA, those after-tax contributions are not taxable. However, only investment earnings on after-tax contributions are taxable at your current income tax rate during the withdrawal to your Roth IRA.
There's a means to avoid those taxes. Regularly withdrawing after-tax money (perhaps monthly or quarterly) or leaving your contributions in a money market fund, can drastically reduce your earnings. If your investments don't yield any return or show losses during a period, there are no applicable taxes.
This can be challenging if you make after-tax contributions and your employer doesn't permit in-service withdrawals. You can still contribute after taxes and transfer the funds to a Roth IRA upon leaving your job, but earnings on after-tax investments could result in a significant tax bill. Consider investing those after-tax funds anyway and transferring the earnings to a traditional IRA instead to avoid the tax bill.
Should I use one?
Should I use a mega backdoor Roth IRA?
If your income level isn't high enough or you cannot max out both your annual 401(k) and traditional IRA contributions, stick with a traditional backdoor Roth IRA conversion. If your employer doesn't allow for in-service withdrawals, a mega backdoor Roth IRA might not be a suitable option for you.
However, if you meet the income and savings requirements, a mega backdoor Roth IRA is an excellent vehicle for diversifying your retirement income -- providing you with both tax-deferred income (taxable at the time of withdrawal) on your pre-tax contributions and tax-free income on your after-tax contributions (if funds are transferred to a Roth IRA). Additionally, a mega backdoor Roth IRA can avoid the taxable event that a regular backdoor Roth IRA conversion often creates.
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In light of the income limitations for Roth IRA contributions, high-income earners may seek alternative methods to save for retirement. One such method is the mega backdoor Roth IRA, which can help high earners surpass the contribution limits.
High-income earners can take advantage of the mega backdoor Roth IRA strategy by contributing funds to a non-deductible traditional IRA and later converting them into a Roth IRA, thereby reducing or eliminating the conversion's tax liability. This method allows individuals to make the most of their retirement finance by utilizing tax-advantaged savings opportunities.
