Happy 401(k) Day! This day is a great reminder to ensure your retirement savings are on track. While you may have your plan in set-it and forget-it mode, making the maximum contributions and having them automatically invested, it is important to occasionally review and update your strategy. Consider rebalancing your investments, adjusting your contribution amounts, or switching between after-tax and pre-tax contributions as needed. You might also explore whether a mega backdoor Roth conversion is right for you.

2024 contribution limits

For 2024, the maximum employee contribution to a 401(k) or Roth 401(k) is $23,000 with an additional $7,500 catch-up contribution allowed for those over the age of 50 for a total of $30,500.

If you’re not already making the maximum contributions, your first priority should be doing that, whether those contributions are pre- or after-tax. If you’re just beginning, contribute at least the minimum you need to get your full company match, then increase by a percentage point or two every time you get a raise.

Talk with your tax advisor about whether pre-tax or post-tax contributions are most advantageous for you. Generally, if you’re in a low tax bracket, contributing to a Roth 401(k) might make the most sense.

what is a mega backdoor roth conversion?

A mega backdoor Roth conversion is a strategy that allows individuals who exceed the income limits for Roth IRA contributions to make after-tax contributions to their employer-sponsored plan, which can then be rolled over into a Roth 401(k) or Roth IRA.

How it works

1. Employees can contribute up to $23,000 (or $30,500 for those over 50) to a Roth or traditional 401(k), with additional employer contributions allowed.
2. If permitted by the plan, employees may also make after-tax contributions, which are not tax-deductible.
3. Beyond the standard $23,000 limit, employees may contribute up to $46,000 in after-tax dollars (less employer contributions) and roll these into a Roth 401(k) or Roth IRA.

who should do a mega backdoor roth conversion?

If you are contributing the maximum amount to your 401(k) and are looking to get more money set aside for retirement, the mega backdoor Roth conversion may be for you.

how to do a mega backdoor roth conversion

1. Confirm that your employer plan allows for after-tax contributions. Only about 11% of plans permit mega backdoor conversions according to data from Fidelity.
2. Determine if in-service rollovers or in-plan conversions are allowed. Check if your plan allows for in-service rollovers to a Roth IRA or if in-plan conversions to a Roth 401(k) are possible.

3. Consult with your financial and tax advisors to make sure that this strategy aligns with your financial goals before initiating contributions and subsequent conversions. If you and your advisors decide to move forward, keep in mind that the after-tax contributions should be converted to the Roth 401(k) or Roth IRA as soon as possible to avoid taxes on earnings.
4. Choose the right investments for your Roth account. Since Roth accounts grow tax-free, it generally makes sense to invest in higher-growth, riskier assets like stocks. Consult your advisor on the best investment strategy for your Roth account.

could mega backdoor roth conversions be eliminated? 

One criticism of mega Roth conversions is they provide a tax advantage only for highly compensated individuals who can afford to contribute up to $69,000 of their income. President Biden’s Build Back Better Act sought to restrict these conversions, but the legislation did not pass. While some legislators continue to support limiting or eliminating this strategy, no laws have been enacted yet.

Speak with your Fulcrum team to understand the pros and cons of backdoor Roth conversions and coordinate with your accountant to help determine whether this strategy is right for you.