Mega Backdoor Roth IRA

For those with access to certain employer-sponsored 401(k) plans, a mega backdoor Roth IRA allows for even larger contributions: 

1. After-Tax Contributions: Contribute after-tax dollars to your 401(k) plan beyond the standard pre-tax contribution limits. 

2. Conversion: Convert these after-tax contributions to a Roth IRA or Roth 401(k), depending on plan provisions. 

In 2025, the total contribution limit (including employer contributions) to a 401(k) plan is $70,000, or $77,500 for those aged 50 or older. 

Advantages

• Tax-Free Growth: Once in a Roth IRA, investments grow tax-free, and qualified withdrawals are also tax-free. 

• No Required Minimum Distributions (RMDs): Unlike traditional IRAs, Roth IRAs do not require RMDs during the account holder’s lifetime. 

• Estate Planning Benefits: Roth IRAs can be passed on to heirs, potentially providing tax-free income for beneficiaries.

Considerations

• Pro-Rata Rule: If you have existing traditional IRA balances with pre-tax contributions, the pro-rata rule can complicate the tax implications of a backdoor Roth conversion. 

• Five-Year Rule: Each Roth conversion has its own five-year holding period before earnings can be withdrawn tax-free. 

• Legislative Risk: While currently legal, backdoor Roth strategies have faced scrutiny, and future legislative changes could impact their availability. 

By systematically employing backdoor Roth IRA strategies, some individuals have accumulated substantial tax-free retirement savings, leveraging the benefits of Roth accounts beyond traditional income limitations.