A mega backdoor Roth refers to a strategy that can potentially allow you to make additional after-tax contributions to a maximum of $69,000 ($76,500 for those 50 and older) in your 401(k) for 2024. If available, the strategy can be particularly useful for those who earn too much to contribute to a Roth IRA directly.

The additional after-tax deferrals may be made up to the 415 limit ($69,000 in 2024), after you have already maxed your elective deferrals ($23,000 in 2024, $30,500 if age 50 or older), less any employer contributions made on your behalf. The after-tax amounts are then converted to Roth as soon as possible.

                     7,500 catch-up contribution available to participants over age 50.

For example, if you are 40 years old and have contributed the maximum of $23,000 in pre-tax and/or Roth contributions. And your employer has also contributed half of this amount, or $11,500, in matching contributions. The maximum that you could contribute after-tax to your 401(k) for 2024 would be:

$69,000 ‒ $23,000 ‒ $11,500 = $34,500

How does a mega backdoor Roth work?

The mega backdoor Roth strategy entails 2 steps: (1) making after-tax contributions to your 401(k), and (2) then doing a conversion either to a Roth IRA or Roth 401(k).

• An after-tax 401(k) contribution is different from a Roth 401(k) contribution and different from a pre-tax contribution, which is often the default option with a 401(k). Why does it start with after-tax contributions? Because after-tax contributions may enable you to save in your workplace retirement plan beyond the annual contribution limit for pre-tax and Roth contributions.

However, after-tax contributions can come with some downsides. One key drawback is that when you make withdrawals in retirement, any earnings will be taxed at ordinary income rates.

• Converting the after-tax contributions to a Roth account. If you have a Roth option within your retirement plan, you may be able to convert the after-tax 401(k) amounts to a Roth 401(k). This is called an in-plan Roth conversion. Or, if your plan allows it, you may be able to roll your after-tax contributions to a Roth IRA. Prorated earnings attributable to the original contribution can be rolled to the Roth IRA, incurring taxes, or separately directed to a traditional IRA without incurring taxes.

Whether you convert to a Roth IRA or Roth 401(k), you will need to pay taxes on any earnings included in the conversion (you will not generally need to pay taxes on contributions you convert, as those amounts have already been taxed). A tax professional/financial advisor can advise you on the potential tax impacts of the strategy on your situation.

Should you consider a mega backdoor Roth?

Whether the mega backdoor Roth strategy is appropriate for your situation can depend on a range of factors. Some issues to consider include:

• How much you are currently saving for retirement and how much you already have saved
• Your cash flow/liquidity available
• What other financial goals you have, and how much you have saved toward these goals
• Your current tax rate versus your potential tax rate in retirement

If you are considering setting up a mega backdoor Roth for yourself, the first step may be to check the details of your workplace retirement plan to make sure that it offers the features and that you are eligible for the strategy.

The next step may be to consult a tax and/or financial professional to see if the strategy makes sense in your situation, and to better understand the impacts on your taxes and planning.

Collabria Capital, Inc. (“Collabria]”) is a registered investment advisor offering advisory services in the State of California and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.

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