>> Matt Nelson: If you're already maxing out your 401k and you think you've hit the savings ceiling, you probably haven't. In my 25 years helping high income clients, this one strategy has added hundreds of thousands of tax free dollars to their retirement. Welcome back everyone. Today we're diving into the mega backdoor Roth. I'll explain exactly what it is, how it works and the pitfalls to avoid so you can decide if it belongs in your retirement plan. So what is a mega, uh, backdoor Roth? In the most basic terms, you make after tax contributions to your 401k. Then you convert those after tax dollars into a Roth IRA or Roth 401, locking in tax free growth. This two step process, or backdoor creates the same end result as a regular Roth contribution. But then what's the point of this for high earners? Well, this strategy keeps both the important tax deferral contributions and a way to build tax free money. But to explain, first we need to review how contributions are made to your 401. So for 2025, if you're under age 50, the IRS allows contributions up to $70,000 in your 401 plan over age 50. And you're allowed even higher limits up to $81,250 depending on your age. Now these totals include the three main components of your standard contributions, your employer matches, and any after tax contributions you make. The standard pre tax or Roth contributions you make are salary deferrals and are limited based on your age. These are up to $23,500 if you're under age 50, up to 31,000 if you're over age 50. And there's a special window for those between age 60 and 63 that allows up to 34,750. Next, most employers will either provide a matching component or profit sharing contribution to your plan that also counts toward the overall limit. But few people realize they can go beyond this standard contribution limits using after tax contributions as long as the combination of the three is not over the plan maximum. Now Fidelity has a great chart to visualize this for someone under age 50. While the plan limits could technically be met with all after tax contributions, most high earning employees will want to benefit from making pre tax contributions up to the limit, then make additional contributions as after tax. So how do you do it? How does the mega backdoor Roth work? Let's talk through the mechanics as a three step flow. So first, max out your traditional or Roth 401k depending on your age. That's up to $34,750. Next, contribute additional after tax dollars. And this is the lesser known strategy. You can keep contributing after tax money until your combined contributions reach the overall plan limits, which depending on your age could be as high as $81,250. Finally, convert those after tax contributions. Now ideally you do this right away either into a Roth 401 inside the plan or which is referred to as an in plan conversion or out to a Roth IRA using an in service rollover. Time is critical here. If you wait too long, those after tax dollars will likely grow and any gains will be taxed when converted. The goal is to convert before earnings accumulate. So is this a good deal? Well, this is one of the most powerful tools available, especially if you're already maxing out your regular 401k contributions and you still have more room to save. So why does this matter? Because Roth money gives you tax free withdrawals in retirement. It doesn't just reduce your future tax bill, it gives you flexibility in how you draw income. I've discussed this concept in prior videos as tax diversification. Now this helps with Social Security timing, Medicare premiums and even legacy planning. Most high income earners struggle to contribute directly to a Roth IRA because of income limits. But the mega backdoor Roth is a legal workaround and when executed correctly it's extremely effective. So who should be thinking about this? Well consider it. If you're maxing out your pre tax or Roth 401k already and you have extra cash flow to save beyond that, you want to build long term tax free income and your employer's plan allows for after tax contributions and in plan Roth conversions or in service rollovers. If that's you, then you're in the sweet spot. We work with a lot of clients in the medtech space with mid six figure household incomes. Many of them are hitting that standard 401k cap by mid year and wondering what's next, they would not be eligible for the regular IRA or Roth contributions. So the mega backdoor roth using their 401 plan is the next best step. So what are some pitfalls and mistakes? Now, like most good strategies, there are some landmines. So let me walk you through a few of the common ones. We see mistake number one, not all 401 plans allow this. You'll need to confirm two things with your plan provider. One, that your plan allows after tax contributions and two that the plan permits either in plan Roth conversions or in service rollovers of after tax balances. Both items are plan document dependent. While we see many companies that do allow for after tax contributions. It's not universal. Much of this has to do with the size of the company, number of employees contributing, and other metrics that allow the plan to pass compliance testing. And sometimes this results in after tax contributions being available, but only up to a certain percentage of salary. Now that means depending on your income level, you might not be able to reach the full maximum plan limits. These days if a plan document has been updated to allow for after tax contributions, it's also common it will allow for in plan conversions or the in service rollover. However, do not just assume this. If you can't complete the process with the conversion, I think you should skip the after tax contributions altogether. It would be better to add this additional cash flow to non retirement investments outside your 401. That way you'd be able to build a more accessible investment account subject to lower capital gains tax treatment instead of a less accessible account where you'll owe regular income tax rates on the gains Waiting Too Long to Convert Remember, if your after tax dollars grow before you move them, the growth gets taxed. Immediate conversion is best here. Again, you need to understand how the logistics of your 401k plan handles the conversions. Some plans allow you to set up automatic conversions and those have been designed with mega backdoor Roth strategies in mind. And you can set it and forget it. But others will require you to manually process the conversions and they may even limit how often you can make these conversions. So read your plan document or actually better yet, just give us a call to research it for you. Now mistake number three Contributing too much. If you overfund your plan, you could trigger excess contribution taxes and a bunch of paperwork headaches. You need to track employer matches in addition to your own since they count toward the limits. And while many plans have guardrails in place to limit over contributing, it isn't always the case that they get caught before the end of the year. The most common instance we see this mistake made is when changing jobs mid year. Your current employer is not typically coordinating with your prior company's contribution amounts. In a case where you were already on track to max out your plan, then you change jobs and began contributing the maximum again. You can easily exceed plan limits for the year. Now mistake number four mixing this up with a regular backdoor Roth. They're not the same. The regular backdoor Roth is for people who make non deductible IRA contributions and then convert them. The Mega version happens through your 401k plan. You could even do both of them at the same time with the right financial conditions done right, this can add hundreds of thousands of tax free dollars to your retirement, but it needs to be done intentionally. Now if your plan supports it and you're in the right position, this is a powerful strategy we use for our clients that you should consider. If you're not sure how to check your plan documents or you want to know if it fits within your larger tax and retirement plan, let's talk. That's what my team's here for. And if you found this helpful, subscribe or check out our other videos on retirement planning, maximizing your 401k or equity compensation. Thanks for watching. And remember, financial freedom takes more than money, so find your purpose. Make a plan to live your life well. If you need any guidance, we're here to help. Investment Advisory Services offered through Savvy Advisors, Inc. 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