Jan 25, 2023
Is there a monster truck in your 401(k)?
The "Mega Back Door Roth" sounds like the name of a monster truck, heavy metal band or dinosaur—big, intense and powerful!
From our experience, these words also describe the Mega Back Door Roth strategy perfectly.
Let's start at the beginning—what is a Mega Back Door Roth? If you are working, you likely have access to a 401(k) retirement plan that allows you to contribute $22,500 in 20231 as part of your employee elective deferral.
The maximum that can be deferred into your plan for 2023 is $66,000,2 which includes your employee elective deferral and the employer match. What this higher limit may allow for (depending on your employer's plan) is to add additional dollars to an after-tax bucket, above and beyond your employee elective deferral of $22,500.
Let's look at some numbers. Say you plan to defer $22,500 throughout the year, and your employer will match 50%, for a total deferral of $33,750. This means there is the potential to add an additional $32,250 to an after-tax bucket before hitting the limit.
This is the “big” part—if your plan and your cash flow allow, you can contribute that $32,750 to a bucket that can ultimately be directed to a Roth IRA. Once the dollars are in the after-tax bucket, you can call your plan administrator to do an in-service withdrawal—where the after-tax portion is sent to your Roth IRA and the earnings to your traditional Roth.3 Note that if you receive checks, make sure they are deposited within 60 days because the 60-day rules still apply.4
In our view, this $32k+ is intense because it's far more than one can contribute by doing a traditional "Back Door Roth," where one contributes to a traditional IRA and then converts to a Roth IRA. In that scenario, the maximum contribution allowed in 2023 is just $6,500.5
And we believe it's powerful because, after a down year in the market, those Roth dollars can grow free of income tax and be distributed without income tax too.6 Getting those dollars to work soon can mean the potential for significant growth down the line.
What to do now?
In our opinion, we believe it would be a best practice to:
- Research if your plan allows for after-tax deferrals once you reach your employee deferral limit contributions of $22,500
- Evaluate your cash flow and determine how much you can direct toward an after-tax bucket
- Review your 401(k) contribution strategy to ensure you are receiving the maximum match from your employer while maximizing your deferrals
- Determine whether you currently have after-tax dollars in your 401(k) that can be rolled into your Roth IRA
If you like the idea of a monster truck in your retirement savings, without the noise or destruction of going to a rally, consider looking into whether a Mega Back Door Roth is right for you. Please reach out to your advisor if you have any questions.
ABOUT THE AUTHOR
Abigail Rosen, MS Financial Planning
Abigail (Abby) Rosen is a CERTIFIED FINANCIAL PLANNER professional with over 17 years of experience in the financial industry. Prior to her career in finance, Abby was an officer in the United States Navy. Abby is responsible for managing client relationships and coordinating all aspects of client service for the team. Abby specializes in working with corporate executives to help them take full advantage of their available benefits, implement in respect to employer stock concentrations and manage their stock option strategies. She has a designation in Global Financial Planning.
She graduated with a Bachelors of Arts from the College of the Holy Cross, and received a Master of Science (distinction) in Financial Planning from Bentley University. She was 2020 Citizen of the Year for her work as Treasurer of the New Jersey Psychological Association, Foundation, is Treasurer of the Harding Township Educational Foundation (HTEF) and a Girl Scout Troop Leader.
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