That max amount includes the $20,500 (or $27,000) employee elective deferral amount we’re most familiar with, as well as any matching contributions from your employer, profit-sharing, and your after-tax contributions. The real limit on a contribution plan like a 401(k) is actually pretty high: this year, it’s $61,000 (or $67,500 for people 50 and older). If you’re a no on either of these, the mega backdoor Roth isn’t a good strategy for you.

In-plan conversions let you move your after-tax contribution into Roth dollars within the 401(k). In-service withdrawals (also called in-service distributions) mean you can take money out of your 401(k) while you’re still employed with the company, and an option is to roll it into a Roth IRA.

Your 401(k) plan must also allow for in-service withdrawals or in-plan Roth conversions.

(We’ve mentioned before how after-tax and post-tax used to be conflated.) Quick vocab lesson: after-tax is an entirely different contribution category from pre-tax and post-tax. Not all 401(k) plans even let you make after-tax contributions.

Your 401(k) plan must allow for after-tax contributions.

There are two prereqs-if you’re unsure about either, double-check with HR or contact your plan administrator. Is a mega backdoor Roth even possible with your 401(k) plan? We’ll walk you through how it works and if it’s a good move for you, but know now that this is complicated, advanced financial planning with the potential for some unexpected tax bills- definitely work with an expert on this one. Some companies’ 401(k) plans are structured to allow for additional after-tax contributions, which can create a “mega backdoor” through which you can invest up to an extra $40,500 into your Roth IRA or Roth 401(k). Limits for total employee and employer contributions have also increased over the past year, and are $61,000 (or $67,600 for people 50 and older). People who are aged 50 and older can contribute an additional $6,500 annually in catch-up contributions, for a total of $27,000 into their 401(k). A person younger than 50 can contribute $20,500 into their 401(k).

The 2022 caps have changed since last year.

Employer contributions are always traditional, pre-tax contributions.) More on that here.

(That said, if your employer made any contributions, you’ll still need to pay taxes on those when you withdraw, since you won’t have paid taxes on those contributions yet. Additionally, as long as your Roth contributions have “aged” for at least five years, any earnings your contributions accrue won’t be taxed either. In exchange, you won’t owe any taxes on your contributions or when you withdraw in the future. This means you will pay taxes on the money the year you earn it, and you won’t benefit from any tax advantages at the time you contribute. When you choose to make Roth contributions, you’ll contribute to your account with after-tax dollars. When circumstances are right and the stars align, this little-known strategy can be a smart way to tuck extra money into a Roth IRA to use for retirement or to save for your heirs. The mega backdoor Roth IRA is a strategy high-earners can use to supercharge retirement savings and shelter investment growth from taxes in retirement.

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