As high-income earners, most physicians aren’t eligible to contribute directly to a Roth IRA due to the IRS income restrictions. Because of this, the Backdoor Roth is a very popular subject of discussion in our physician communities. If you want to contribute even more post tax dollars into a retirement account, there is another option that is less well known, but powerful. The Mega Backdoor Roth is a powerful option for physicians to put a significant amount of post tax dollars into a 401k plan and then roll it into a Roth (either a Roth IRA or Roth 401k), provided that you have a 401k plan with specific features. Below, we cover the basics of Mega Backdoor Roths, how to do one, and who should consider doing one.
As always, note that we are not accountants and you should consult appropriate expertise before taking action based on these ideas, which are not individualized to your personal situation. You should make sure this is accurate and up to date. This page contains affiliate links from our advertisers, which support the group at no cost to you. To learn more, visit our disclaimers and disclosures.
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Basics of Roth Accounts
Roth IRAs, Backdoor Roth IRAs, Mega Backdoor Roths… it can be a confusing mess of terms and options if you’re unfamiliar with the differences. Let’s briefly distinguish between them.
Roth Accounts
Roth is a type of tax classification. With Roth accounts, you pay taxes on the contributions upfront before you put money into the account. When funds are later withdrawn, they aren’t subject to taxes (unless you withdraw them before the designated retirement age).
The after-tax contributions you make to your Roth accounts grow tax free, which can be a powerful wealth building tool, especially if you start investing in Roths early in your career.
As an added bonus, beginning in 2024, Roth IRAs and Roth 401(k)s accounts don’t have required minimum distributions (RMDs) when you hit retirement age (except for some inherited accounts).
Traditional retirement accounts, on the other hand, allow pre-tax contributions (which help lower your taxable income for the year). In these accounts, you pay taxes when you withdraw the funds. Once you hit retirement age, you’re required to withdraw a certain amount, since Uncle Sam wants his cut with taxes.
Roth IRAs
An IRA is an Individual Retirement Account, which is a type of tax-advantaged investment account that the IRS has special rules for to help encourage individuals to save for retirement. Because of the tax advantages, the IRS restricts the amount you can contribute annually, based on your age and income. Many high-income individuals aren’t allowed to contribute directly to a Roth IRA at all.
Most full-time attendings make more than the annual income limit (single individuals with a modified adjusted gross income above $161,000 or married filing jointly above $240,000 for 2024) and thus aren’t eligible to contribute directly to a Roth IRA. But there are some legal loopholes to get around this rule.
Learn more about Roth IRAs
Backdoor Roth IRAs
Backdoor Roth IRAs are a way for high-income earners to contribute to a Roth IRA indirectly so they can still benefit from the advantages of tax-free growth on their investments.
A Backdoor Roth IRA involves contributing after-tax funds to a traditional IRA, then rolling them over into a Roth IRA.
To take advantage of the tax benefits of a Backdoor Roth IRA, you cannot have any pre-tax funds in a traditional IRA (which typically occurs when you roll over a previous employer’s 401(k) to an IRA). Otherwise, you are subject to the IRS’s pro-rata rule.
Learn more about Backdoor Roth IRAs
What Are Mega Backdoor Roths?
A Mega Backdoor Roth takes a Backdoor Roth IRA and supersizes it. It allows individuals with a qualifying 401(k) plan to make after-tax contributions to their plan and roll them into a Roth IRA or Roth 401(k). This is a useful tax strategy if you want to increase the amount of tax-free funds in your investment portfolio, especially if you’re looking to minimize your required minimum distributions (RMDs) and tax bill once you hit retirement.
A Mega Backdoor Roth is more limited in who is eligible to do one because:
It is done with an employer-sponsored 401(k)
Your 401(k) has to allow after-tax contributions (not the same as Roth contributions)
Your 401(k) has to allow in-service distributions or withdrawals (or in-service rollovers)
Some solo 401(k) plans offer these features, so 1099 physicians interested in the Mega Backdoor Roth should check to see if they can customize their plan to allow for this feature if it’s a good fit for their situation as outlined below. Most of the common brokerages physicians use for their solo401ks do not yet offer this option in their standard documents, so you usually need to use a company to facilitate the customization of the plan if your plan is housed at one of these brokerages.
The benefit of a Mega Backdoor Roth is that it allows you to contribute significantly more than a Roth IRA or Backdoor Roth IRA. In 2024, the standard contribution limits for Roth IRAs and Backdoor Roth IRAs were each $7,000 (with an additional $1,000 catch-up contribution for individuals 50 and older). A Mega Backdoor Roth, however, utilizes annual 401(k) limits (see the next section below).
Caveat: you can’t make after-tax contributions for a Mega Backdoor Roth until after you’ve reached your 401(k) employee contribution limit. For 2024, that limit is $23,000, with an additional $7,500 in catch-up contributions for individuals 50 and older.
How Do Mega Backdoor Roths Work?
There are a few different limits within a 401(k) to understand as we look at the Mega Backdoor Roth. (The numbers provided are for 2024)
EmployEE contribution limit: $23,000
Maximum annual contribution limit (total between you and your employer): $69,000
Your employER match (if any)
With an annual limit of $69,000 and your regular employee contributions of $23,000, you’ll be able to add an additional $46,000 of after-tax contributions into your 401(k) account, though this assumes you get no employer match.
With an employer match, you have to deduct your employer’s contribution.
So if they match half of what you put in, they’d contribute $11,500 for your $23,000, reducing your $46,000 after-tax contributions to $34,500.
Steps of the Mega Backdoor Roth
1. Check with your plan administration to make sure you have the features available in your 401(k).
2. Max out your regular employee contributions to your traditional 401(k) for the year.
3. Make your after-tax contributions to the plan, up to the limit as described in the previous section.
4. Transfer your after-tax contributions portion to a Roth IRA (in-service rollover) or to a Roth 401(k) (in-service conversion), depending on what your plan allows. If your 401(k) plan is a Roth 401(k), you can only do the in-service rollover to a Roth IRA.
You can roll over into an existing Roth IRA or open a new one with a company such as Fidelity or Vanguard.
You’ll want to make sure your plan allows you to use only your after-tax contributions so that you don’t generate a hefty tax bill for including and converting your pre-tax employee and employer contributions in your traditional 401(k).
Timing Your Mega Backdoor Roth
If your plan allows for in-service rollovers and/or conversions, you’re able to do the Mega Backdoor Roth at any point in time, so long as you don’t go over the annual limits described above.
When you do a Mega Backdoor Roth, you will have to pay taxes on any earnings that have accrued on your after-tax contributions since you added them to the plan. Thus, it’s better to roll over your after-tax contributions as soon as possible to minimize any taxable gains.
Who Should Consider a Mega Backdoor Roth?
Mega Backdoor Roths are complicated and aren’t the best strategy for first time investors just getting started in their retirement planning. Consider the Mega Backdoor Roth if the following align with your personal situation.
You’re out of residency and ineligible for a standard Roth IRA with your attending salary
You’ve already taken care of other basic financial goals such as paying down debt or saving up for your first home down payment.
You’ve already maxed out your regular 401(k) contributions and other tax-advantages accounts like an HSA and 529 plan.
You have extra money left over to save for retirement
You won’t need to touch the funds until after the IRS retirement age
Alternatives to the Mega Backdoor Roth
If the situation above does not apply to you, there are still other options to increase your tax-advantaged retirement savings. Consider the following instead.
Contribute to a Roth 401(k)
Max out a Roth IRA or Backdoor Roth IRA
Contribute to a HSA
Self-employed physicians, consider opening an eligible retirement plan
You can also invest into a taxable brokerage account with a company like Fidelity or Vanguard, though this option doesn’t provide the same tax benefits as the options above.
Conclusion
Mega Backdoor Roths allow high-earning individuals, such as physicians, to up their ability to maximize tax-free growth through some unique tax loopholes and features of employer-sponsored retirement plans.
The Mega Backdoor Roth is a complicated process that, if done incorrectly, can result in hefty tax bills, so we recommend working with a financial advisor or tax professional to make sure you complete the process quickly and correctly.
If the Mega Backdoor Roth isn’t a good fit for your current financial situation or your employer doesn’t offer the features required to complete the process, explore these other tax-advantaged options.
Solo 401(k)Â (for self-employed physicians)