Articles | December 8, 2020
A mega backdoor Roth strategy allows employees participating in 401(k) plans with after-tax contributions to save in a Roth account, even if their high income would normally disqualify them from contributing to a Roth IRA. It also lets employees save up to $37,500 in the Roth 401(k) account, which exceeds the normal $6,000 Roth IRA annual limit, making the mega backdoor Roth an attractive strategy for high-earning talent wanting to maximize their savings.
The type of employee with the income to take advantage of this technique typically adds a lot of value to the organization. If you’re an HR or benefits officer looking to attract that type of talent, you may want to consider advertising your ability to accommodate mega backdoor Roths.
The mega backdoor Roth won’t appeal to everybody. Here’s the criteria someone has to meet for this technique to work:
While the first two criteria depend on the high-earning individual, the plan design of the 401(k) plan depends on your organization. You can easily amend your 401(k) plan to allow for a mega backdoor Roth. But if your plan already allows for it, informing interested employees allows you to provide an additional incentive without much effort on your part.
Because employers can’t directly manage the retirement funds of their workers, most of the burden for pulling off a mega backdoor Roth falls on the interested employee’s shoulders. But you can still help guide the employee through the process, which is why you should know what they have to do to successfully create a backdoor mega Roth.
The mega backdoor Roth may hold limited appeal to most of your workforce, but the growth of the FIRE movement (financially independent, retire early) has created a vibrant culture of super-savers among some Millennials. These workers tend to work in fields where employers beat down their door (such as skilled software engineers), so offering a mega backdoor Roth could give your organization an edge with this talent segment.
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
Don't miss out. Join 16,000 others who already get the latest insights from Segal.