The “mega backdoor Roth” is a strategy that allows individuals to contribute significantly more to Roth retirement accounts than typically permitted by standard contribution limits. This is achieved by contributing after-tax dollars to a 401(k) plan and then converting those funds to a Roth IRA. For example, consider a scenario where an employee maximizes their pre-tax 401(k) contributions and their employer’s matching contributions. The “mega backdoor Roth” would then enable that employee to make substantial additional after-tax contributions up to the IRS’s combined contribution limit, subsequently converting that amount to a Roth IRA.
The importance of this strategy lies in its potential to significantly increase retirement savings, particularly for high-income earners who may be restricted from directly contributing to a Roth IRA. The primary benefit is the tax-free growth and tax-free withdrawals in retirement offered by Roth accounts. Historically, it has become increasingly popular as individuals seek avenues to maximize retirement savings within the confines of existing tax laws.
