The Mega Backdoor Roth
The twentieth episode of our 401(k) season explains the mega backdoor Roth, the advanced two-feature strategy that lets high savers move far more money into Roth territory than the ordinary deferral ceiling allows. John, Maria, Melissa and Steve explain the three flavors of money inside a 401(k) (pre-tax deferrals, Roth deferrals, and the overlooked after-tax contribution that is not a Roth contribution), the overall plan ceiling for twenty twenty six of seventy two thousand dollars and the subtraction that creates the after-tax room (a worked example stack of twenty four thousand five hundred of deferrals plus seven thousand five hundred of employer money leaves forty thousand dollars of room), the two questions to ask any plan administrator, the in-plan conversion and Roth IRA rollover versions of the strategy, why prompt — ideally automatic — conversion keeps the taxable earnings sliver near zero, and why the IRA pro-rata blending trap does not reach inside the plan while careless rollovers can still create one. The episode contrasts the mega backdoor with the smaller ordinary backdoor Roth IRA, walks an eight-step implementation, stress-tests the arithmetic with clearly labelled invented case studies (Priya, a fictional Seattle engineer who moves thirty eight thousand dollars through the corridor in one year inside a seventy two thousand dollar stack, whose single year at a hypothetical six percent for thirty years illustrates about two hundred eighteen thousand dollars of tax-free qualified growth; and Daniel, a fictional Ohio facilities manager using the same corridor at modest scale), and gives the honest limits in full: many plans offer neither feature, fairness testing can refund contributions, legislative proposals to close the corridor have been made and have not become law, and the strategy belongs sixth in the savings order, after the emergency fund, the full employer match, expensive debt, ordinary deferrals and other shelters. Plus six common mistakes, the five-year clocks, job-change split rollovers, and five questions to bring to a qualified tax professional. Education only — no recommendations, no predictions.
Sources referenced (public, dated): Internal Revenue Service — elective deferral and overall defined contribution limits for 2025 (Notice 2024-80) and 2026 (Notice 2025-67), guidance on one-participant and workplace plan contribution types, in-plan Roth rollovers and the split rollover allocation guidance for after-tax amounts (Notice 2014-54), Roth account five-year rules and conversion reporting in Publication 590-A and Publication 575, on irs.gov; U.S. Department of Labor, Employee Benefits Security Administration — summary plan description and participant information guidance, on dol.gov. Plan rules on after-tax contributions, conversions and in-service distributions vary by plan document and are described in general educational terms; listeners should read their own plan documents, which govern their own accounts, and confirm any strategy with a qualified tax professional. The case studies and worked examples are invented and illustrative; the arithmetic examples are teaching calculations using stated assumptions, not forecasts or tax advice.
Audio format: MP3, 128 kbps CBR, 44.1 kHz, mono, -16 LUFS.
This episode is for financial education only and is not investment advice. Narration is AI-generated.
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