Since I started saving for retirement in 1999, I’ve been a proponent of tax-deferred retirement vehicles like the 401(k) and a skeptic of now-taxable vehicles like the Roth IRA. Working in banking, I was already paying taxes and had no desire to pay more. Honestly, I wasn’t familiar with a Roth IRA or a jumbo Roth IRA when I first started.
The Roth IRA was created by law Taxpayer Relief Act of 1997 It became available to taxpayers on January 1, 1998. It is named after Senator William Roth of Delaware, a major advocate of this retirement savings tool.
Unlike traditional IRAs or 401(k)s, which use pre-tax contributions but require taxes on withdrawals, Roth IRAs are funded with after-tax dollars, allowing tax-free withdrawals on qualified distributions.
Slowly warm up to a Roth IRA
In 1999, I had just gotten my first job out of college. Retirement planning has never been my top priority. After maxing out my 401(k), I focused on growing my career and building a taxable brokerage account to one day purchase real estate — my favorite asset class for building wealth.
Throughout my twenties and thirties, I remained consistent against Roth IRAs. I’ve always been in the above 24% federal marginal income tax bracket, so paying taxes upfront was tantamount to capitulating to an inefficient government that wastes hundreds of billions of taxpayer dollars annually.
However, in my early 40s, earning much less income after early retirement, I began to see the appeal of the Roth IRA. I even wrote a post titled Why I Didn’t Contribute to a Roth IRA But Why Should You As a way to make up for my previous position.
The ability to let investments grow tax-free for decades and withdraw without any taxes is a powerful strategy for diversifying retirement income. I see this benefit more clearly now as I approach traditional retirement age.
The Mega Backdoor Roth IRA: A smart move for super savers
I don’t want to repeat my previous mistake of throwing out a Roth IRA out of stubbornness or lack of understanding. That’s why I decided to focus on the Mega Backdoor Roth IRA to see if that’s something we could benefit from.
The Mega Backdoor Roth IRA is a three-step strategy that allows employees to contribute significantly more to their retirement plans than standard limits. For example, in 2025, the employee 401(k) contribution limit is $23,500. Adding employer contributions, the total allowable contribution becomes $70,000. However, while employees can control their own contributions, they cannot determine how much their employers contribute.
If you’re able to contribute a maximum of $23,500 per year, that’s great — only about 13% to 15% of employees manage to do this. But with the Mega Backdoor Roth IRA, you can max out your employees and save even more.
This strategy is ideal for high earners, super savers, and personal finance enthusiasts looking to maximize their retirement wealth. Since you’ve been reading Financial samuraiThis is probably you! For context, the median income for all American families is about $80,100 in 2024, and $120,000 for married couples, according to the Census Bureau.
Why use a “back door”? Income limits for Roth IRA contributions
The main reason to explore the Mega Backdoor Roth IRA is the income limits for contributing to a standard Roth IRA. When I first started working in banking, I was not eligible to contribute after my first year due to these restrictions. It took a full year of work before I realized the benefits of a Roth IRA.
Arbitrary income limits have always struck me as counterintuitive. Shouldn’t the government be encouraging? everyone Saving for retirement, especially younger employees? The more people save now, the less they will rely on government support later.
Here are the latest Roth IRA income limits for 2025:
- Single files: You can make a full Roth IRA contribution if your income is less than $150,000.
- Married couples filing jointly: You can make a full contribution if your combined income is less than $236,000.
If your income is higher:
- Solo bloggers who earn between $150,000 and $165,000, and co-bloggers who earn between $236,000 and $246,000, can do business. partial input.
- Solo bloggers who earn $165,000 or more, and co-bloggers who earn $246,000 or more, are ineligible To contribute directly to a Roth IRA.
That’s where the Mega Backdoor Roth IRA comes in, providing a way for high-income earners to bypass these limitations and continue growing their retirement savings tax-free.
How to Contribute to a Mega Backdoor Roth IRA
1) Employees begin maxing out their pre-tax 401(k) contributions, which the IRS recently announced will be $23,500 in 2025. For those 50 and older, there’s an additional $7,500 in contributions Catch up.
2) They then allocate more of their paychecks toward after-tax contributions to the 401(k) plan. For example, an employee contributes another $20,000 after-tax to a 401(k).
3) Finally, they convert those after-tax contributions to Roth status, either immediately or automatically if their plan allows it. This ensures contributions grow tax-free and can be withdrawn tax-free in retirement.
Very easy isn’t it? This strategy is especially valuable for high-income earners who exceed the income limits of a regular Roth IRA. By tapping into a 401(k), they can save up to $70,000 in 2025 — or $77,500 if they’re 50 or older — while taking full advantage of growth and tax-free withdrawals. These numbers are total numbers, including the employer contribution.
The problem is that not all employers and 401(k) providers offer the option to do a massive backdoor Roth IRA. Hence, you should ask your HR staff about this option.
Knowing your marginal federal income tax rate is important for a Mega Backdoor Roth IRA
Here’s the thing about contributing to a Mega Backdoor Roth IRA: Once you earn more than $197,300 as a single filer or $394,600 as a married couple, your federal marginal income tax bracket increases by 8%, bumping you up to the 32% bracket for 2025. From there Rates continue to rise, reaching 35% and eventually 37%.
Would you really be excited to pay the 32%-37% marginal federal income tax rate to grow your Mega Backdoor Roth IRA? The answer depends on your expectations of future tax rates and the amount you expect to earn or withdraw once you reach traditional retirement age (60+).
With Trump as president, these marginal federal income tax brackets will likely remain unchanged from 2025 to 2029. However, taxes could increase under the next president, which is why diversifying your retirement savings remains crucial.
The main reason to contribute to a Mega Backdoor Roth IRA
The final reason to proceed with a Mega Backdoor Roth IRA is that you will have to pay taxes on any amount that exceeds the 401(k) contribution limit. anyway.
So, instead of paying taxes on your income and investing the money in a taxable brokerage account, why not contribute after-tax dollars to a Mega Backdoor Roth IRA and let the money accumulate tax-free? When it comes time to withdraw, all earnings will also be tax-free, unlike taxable gains from a brokerage account.
When Can You Withdraw From a Mega Backdoor Roth IRA Without Penalty?
You can withdraw Contributions At any time. To be able to withdraw Profits Tax- and penalty-free, a Roth IRA must be at least five years old, meet an age requirement (59.5), or qualify for one of the exceptions such as first-time home purchase, disability, or education expenses. So that’s a downside, you have to wait until 59.5 if you want to use the money now to buy a house or something like that.
You also avoid annual taxes on dividends and interest that might be taxed in a brokerage account. In addition, you will also avoid capital gains taxes on any appreciation when you eventually withdraw from the Roth IRA. The ability to compound your tax break over time is a huge benefit.
Converting your Mega Backdoor Roth funds to an existing Roth IRA where the five-year rule has already been met can help simplify and speed up access to penalty-free withdrawals. Now let’s look at an example.
Example of penalty-free withdrawal from a Mega Backdoor Roth IRA
scenario:
- Contributions: John contributes $20,000 after-tax to his 401(k) and immediately converts it to a Roth IRA via the Mega Backdoor Roth strategy.
- Profits: Over 10 years, these contributions grow to $35,000 thanks to investments.
- Account age: The Roth IRA has been open for 10 years.
- age: John is 60 years old.
steps:
- John withdraws $35,000 from his Roth IRA:
- The $20,000 in contributions can be withdrawn tax-free and penalty-free at any time because they were after-tax contributions.
- $15,000 in profits IThey are also withdrawn tax-free and penalty-free for the following reasons:
- John’s age is over 59 and a half years old.
- The account has been open for more than five years.
outcome:
John can withdraw the entire $35,000 without paying any taxes or penalties.
Alternative scenario: early withdrawal of contributions only
If John is age 45 and needs $10,000, he can withdraw up to $20,000 of his contributions tax- and penalty-free. However, a withdrawal of $15,000 in earnings will result in taxes and penalties unless it qualifies for an exception.
Best combination of income and net worth for a Mega Backdoor Roth IRA
For those with high net worth and low income, you have the perfect combination to benefit from a mega Roth strategy.
For example, let’s say you’re a 47-year-old single individual with a net worth of $3 million, but one year you decided to leave your job in March and you only made $48,000 all year. You’re in the 12% marginal federal income tax bracket, which is very reasonable. In this case, you should consider contributing the maximum of $23,500 to an employee 401(k) contribution and then making an additional $24,500 in after-tax contributions to the 401(k).
Given your lower tax bracket today, it’s very likely that the 12% rate you pay now is less than the rate you’ll face when your required minimum distributions (RMDs) start at age 73. This applies to retirement accounts such as traditional IRAs, 401(k)s and other tax-deferred retirement plans, as outlined in the SECURE Act 2.0.
By contributing to a jumbo Roth IRA, you can take advantage of lower taxes now and avoid potentially higher taxes in the future. As for income, we hope you live off the passive income generated by your $3 million net worth.
Talk to your employer and plan provider
Every employee looking to increase their retirement savings should ask their employer and plan provider about the jumbo Roth IRA option. Yes, paying taxes upfront can be a pain, but remember that you would have had to pay those taxes on any contributions beyond your employee’s 401(k) limit anyway.
Happy huge retirement savings! When your knees start creaking and your back starts complaining, you’ll be glad you got to work while you still have the energy.
Readers, does anyone actually use the massive backdoor Roth IRA? What are some potential downsides we should be aware of? And how do you decide how much to contribute to your taxable brokerage account or other taxable investments versus your massive backdoor Roth IRA?
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