In this Episode of the Secure Your Retirement Podcast, Radon Stancil and Murs Tariq discuss the powerful Mega Backdoor Roth strategy with Director of Financial Planning and Tax Strategy, Taylor Wolverton. They break down how high-income earners can potentially create tax free wealth using advanced Roth 401k strategy techniques, including 401k after tax contributions and in-plan conversions. This episode dives into how these lesser-known financial planning strategies can help individuals who are serious about retirement tax planning and building a strong retirement financial plan.

Listen in to learn about the differences between a Mega Backdoor Roth, a Backdoor Roth IRA, and traditional retirement savings strategies. Radon, Murs, and Taylor explain the role of 401k contribution limits, Roth IRA income limits, and how these strategies may help high-income earners implement a smart tax strategy designed to maximize tax free retirement income. If you’re focused on planning retirement, creating a retirement checklist, and learning how to retire comfortably, this episode offers valuable insights to help you secure your retirement.

In this episode, find out:

• How the Mega Backdoor Roth works and why it can be a powerful high income tax strategy
• The difference between after-tax 401k contributions, traditional 401k contributions, and Roth options
• How Roth conversion strategies can potentially turn taxable growth into tax free retirement income
• The key differences between a Backdoor Roth IRA and the Mega Backdoor Roth 401k strategy
• Important considerations when including this strategy in your retirement financial plan and overall retirement planning strategy

Tweetable Quotes:

“The reason people call it a Mega Backdoor Roth is because you’re not contributing directly to the Roth 401k—you’re contributing after-tax dollars and converting them to build a larger tax-free portfolio.” – Radon Stancil

“If your income is above the Roth IRA income limits, you may still have options to get money into a Roth through strategies like the Backdoor Roth IRA or Mega Backdoor Roth.” – Murs Tariq

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Welcome everyone to Secure Your Retirement. It’s an exciting day. I hope everybody’s excited. We love it when we get to have Taylor Wolverton on as a special guest. So, before I say anything, Taylor, just thank you very much for coming on and chatting with us today. 

Yeah, of course. Thanks for having me. So, everybody knows that Taylor is our director of financial planning and tax strategy. And a big part of what she does for us is helping us with all the different tax strategies that we try to help our clients think through and know about. And so, a lot of times Taylor’s coming to me and Murs and saying, hey. 

this is something I think we might want to talk to this client about, and it could be a variety of different things. And so, when we hear her talking about things, we say, hey, you know what? This would be good to share on the podcast. And so, we’ve got two things that we’re going to talk about today, and I’ll just kind of outline it. We’re going to talk about after-tax contributions to 401ks, and we’re going to talk about what people know as the backdoor Roth in a 401k. 

Uh, we’re going to take it one at a time. So, the first thing, that we’re going to talk about is this idea of putting in after tax dollars into a 401k. Now, when I heard this, I’m like, okay, I need to understand why a person would do this. So Taylor, can you just walk us through, first of all, what most people do with a 401k and maybe what even the, you know, we, there are options to put money in as a Roth and those, but can you just walk us through the traditional way people look at a 401k and then what you’re talking about? Yes. 

So, most 401ks offer at least the ability to contribute pre-tax or traditional, where the dollars you add to your 401k, you do not pay tax on in the year that you make the contribution. Most 401ks also offer Roth contributions, although not every 401k does. 

Most of them do, where you do pay tax on your contributions at the time that you make those contributions to the 401k. So pre-tax or Roth is a pretty typical choice that you have to make when you contribute to your 401k. And then typically your employer also makes some sort of matching contribution to your 401k for you as well to add to your balance over time. 

So that’s pretty standard across 401ks. But there is a third option called after-tax contributions that not every 401k custodian or 401k administrator allows for it. So, you have to go to your specific 401k to find out if it is allowed. But that’s the third one that we kind of want to consider and talk about. 

If it is an option, then when would you want to do that and what kinds of things do you want to think about? Yeah, I remember reading an article probably a few years ago at this point. There was a lot of people talking about this idea of a mega backdoor Roth. 

And after you read a little bit more about it, it’s talking about what we’re about to, which is the after-tax 401k contribution. So, I think most people haven’t really heard about what an after-tax 401k contribution is and why you would do it. So first, I think let’s talk through… 

what that is. And the first question most people say is, why not just put the money in a Roth account? Why no Roth IRA? So, help distinguish between Roth IRAs too and the limitations there and then what an after-tax 401k contribution is. And then we’ll keep going from there. Yes. So, when you contribute to your 401k as either a pre-tax contribution or a Roth contribution, the standard 

dollar limitation that everyone is subject to is for 2026 24 500 so you as a person who contributes to their 401k you can put in 24 500 traditional or Roth or some of both if you are over the age of 50 you can add another eight thousand dollars as your catch-up contribution 

Or if you’re between the ages of 60 and 63, you can add another $11,250 as your, they call it super catch-up contribution. So, depending on your age, that’s kind of what determines what your maximum contribution is. At a minimum, $24,500. If you’re over age 50, your total is $32,500. If you’re between the ages of 60 and 63, your total is… 

$35,750. And those dollar figures are indexed for inflation. Those are 2026 numbers. But if you’re listening to this in a future year, it’s going to be different for whatever the future year is. So that’s the limit for Roth and pre-tax. Sorry, go ahead. No, no, I was just going to say, so just for everybody listening, so that’s what we would put in. 

And then some employers will actually do some type of match where they’ll put in some money. So, this is what you just described with the 24 and then the catchups. That’s what I would put in as an individual. And then I could be with an employer who does some kind of a match, whether it’s 3%, 5%, whatever they put in there. And then that would be on top of that, correct? 

Yes, correct. Yeah. These dollar figures are employee maximum contributions. Any employer matching contribution is on top of or in addition to that. Yes, correct. All right. So now you did talk about this idea of doing this, you know, after tax. So now let’s say I fill up this part that we just talked about, right? So, most people in most plans think, oh, I can’t put any more money into my 401k. 

But there’s actually more money that can go in there sometimes. And so, can you walk us through what that looks like? Yes. I might share my screen. Oh, I can’t share my screen and fill this in like a spreadsheet. It kind of helps to be able to like to see it if you’re watching this rather than listening to it. Yeah. And I think it would be good to share. Radon’s giving you access, but there’s plenty of people that are watching on YouTube as well as Spotify today gives you a video as well. Apple. 

Apple Podcasts may catch up at some point with the times and put video there too but go ahead and share your screen. So, every 401k also has what’s referred to as the 415 limit. The standard 415 limit is $72,000. The catch-up contributions are on top of the 415 limit. So, let’s say in this example, you’re over the age of 50. That means you can add 

$24,500 to your 401k, and you’re eligible for an $8,000 catch-up contribution. And then let’s say your employer adds $3,000 to your 401k. So as the employee, you contribute the $32,500. Your employer adds another $3,000. So total contributions going into your 401k is $35,500. 

The 415 limit is $72,000 plus your $8,000 catch-up, so a total $80,000. This is the limit for what you as an employee and your employer can both add to your 401k for 2026. So, if we think of after-tax contributions as… 

coming in last on top of your contributions as employee and your employer’s contributions, then that’s going to be the difference between the $80,000 for 15 limit and the 30. 

$45,500 between employee and employer contributions. So that would mean with after-tax contributions, the opportunity to contribute is $44,500. Of course, it’s your choice. If you want to add that much, you can. If you want to add less than that, you can. That’s just the maximum. So, I’m considering this. I’ve got excess. 

cash flow and I want to save more into my 401k now that I know that there’s after-tax contributions allowable in my plan, why would I do this? Do I get more tax benefit right now by putting in or what’s the main driver behind overfunding a 401k? Right. Yeah, exactly. When would you actually want to pursue this? Yes, you need the surplus cash flow to be able to make those contributions in the first place. 

make the contributions after tax themselves. So, there is no tax benefit in the year that you make the contribution. You pay tax on those dollars that you contribute as after tax. But the opportunity is once you have contributed after tax, typically inside of your 401k, you can do what’s called an in-plan conversion. So that’s when your 401k administrator will take your after-tax contributions. 

and convert them to your Roth 401k. So, it’s kind of a roundabout way to add more to your Roth 401k by doing the in-plan conversions. At the time of conversion, there is also no tax benefit. It’s simply just taking after-tax dollars, moving them over to the Roth 401k. But that adds to your… 

Roth portfolio, your tax-free portfolio, those contributions should be invested inside of your 401k. And as they continue earning over time, the earnings are tax-free. If the contributions sit in the after-tax bucket of your 401k, the earnings are tax-deferred, same as they would be traditional. So, you want to do the in-plan conversions, as long as your custodian allows for that, to get them over to the Roth 401k as soon as possible. 

so that the earnings can continue compounding tax-free in that Roth bucket. So just for on that real quick, just so we can visualize it. So, if I did this, let’s just walk it through. Let’s say I did put the money in and my custodian or my plan would allow, and I then convert it, let’s call it almost immediately in the plan. I’m not paying any money to convert that because I put it in after tax. So now instantly that 

$44,500 of extra money that I put in, in all essence, now goes into my Roth because I converted it. So now anything that $44,500 earns, I’m earning tax-free dollars. That’s the key here behind this strategy. Yes. And that’s why you’ll see it referred to sometimes as the mega backdoor Roth, because you’re not contributing directly to the Roth 401k. You’re contributing to the after tax. 

and converting it to the Roth. So that’s the backdoor kind of roundabout way of adding more to your 401k beyond the limitations of the $24,500 that you’re typically subject to. Right. Because if you said, well, I’m going to just contribute to my Roth 401k, I can put in the $24,500, but then I’m kind of, that’s it. Whereas by doing this strategy, you could have someone contribute the $24,500 to the pre-tax. 

401k, get the tax benefit there, then overload their after tax and still get the conversion and still get $50,000 plus into the Roth bucket. For high income earners that have excess cash flow and their plan allows it, I think it could make a lot of sense to be utilizing this type of strategy to get money into Roth and very likely on the Roth IRA. 

the IRA, not the 401k, there’s income limitations to be able to put into that account anyways. So, if you have this much extra cashflow, very likely you don’t qualify for a Roth IRA contribution as it is. So, it sounds a lot like a backdoor Roth IRA. So, help us understand the difference between this backdoor 401k versus the backdoor Roth IRA, because we do that for clients too. And I know there’s nuances that you have to deal with quite a bit. 

Yes, so 401k limitations are higher. The dollar amount that you can contribute to your 401k is much higher than what you can contribute to your IRAs. So that’s one difference, the actual dollar limitation. The maximum amount you can contribute to your IRA in 2026 is $7,500. If you are over the age of 50, you’re allowed an $1,100 catch-up. 

So total over age 50 that you could put into your IRA is $8,600. So obviously very different, much lower than the 401k contribution. The other difference between 401k and IRA contributions are your 401k contributions do not have income limitations, but the IRAs have much stricter income limitations. If you… 

want to contribute to your Roth IRA and you’re married filing jointly, in 2026, your adjusted gross income must be below $242,000 to make the full contribution. So, with where 401k contributions, you don’t really need to pay attention to your income amount. You just make the contribution. End of story. If you’re going to contribute to your Roth IRA, you need to pay attention to your income that you’re going to be earning for the year. 

Because if you’re beyond those limitations, you are not eligible to contribute to the Roth IRA. Traditional IRA income limitations are even stricter. Married filing jointly to be able to contribute to a traditional IRA and make the deduction on your tax return, your income needs to be below $129,000. So that’s something you have to be really careful to pay attention to for the eligibility to even make an IRA contribution in the first place. So, let’s just say that my income. 

So, I think there’s two different things. If my income’s high, I could consider doing this another way, right? So that would be the backdoor Roth, right? Correct. Yes. But if my incomes below that, would I still want to do the backdoor Roth? No. If your income is below, like I said, married filing jointly, if you’re below $242,000, you’re eligible to make a direct up to $8,600 Roth IRA contribution. If that’s where you’re at, make the direct Roth. 

contribution. But if your income is above that, it is important to know that you still have options to do a more roundabout backdoor Roth contribution, still accomplish the same end goal by getting those dollars into the Roth IRA, but avoid the income limitations. So, if your income is 

above that threshold to where you’re not eligible to directly contribute to a Roth IRA, that’s where we can consider the backdoor Roth IRA. And the steps to complete the backdoor Roth IRA look like contributing first to your traditional IRA. 

You do not take a deduction for that on your tax return. There’s nothing you have to do at the time of the contribution. All of this reporting happens on the tax return. So, you put, let’s say, $8,600. Let’s say you’re over the age of 50. You put $8,600 into your traditional IRA, and then we convert it from the traditional IRA to the Roth IRA. There are no income limitations on conversions. 

So that’s not an issue. So that’s the, again, kind of roundabout way we got to go to the traditional IRA first and then convert it to the Roth IRA second. That’s why it’s referred to as backdoor Roth IRA. The backdoor is by converting from the traditional IRA first. So, if you’re beyond those income limitations, that’s something we can consider doing. However, one caution that I would give is if you have existing traditional IRA balances, 

Honestly, my recommendation would be to not do this because the IRS does not allow you to isolate specific dollars in your traditional IRA to do the conversion. So, if you add $8,600 to your traditional IRA, you can’t choose that same $8,600 to convert to the Roth. They’re going to do this whole weird calculation where they take a proportion of what’s… 

what you just contributed and what’s already in the account and then do the conversion. It’s going to cost you more in taxes is kind of the base, the idea if you have an existing traditional IRA balance. So, to keep it simple, if you have existing traditional IRA balances and you’re beyond the income limitation to contribute directly to a Roth IRA, I would not do this backdoor Roth IRA strategy at all because it will only cost you more in taxes. 

and you’re going to have to keep track of a lot of information that is just not worth the hassle so got it got it yeah soon as we explained it seems like a no-brainer that everyone should be doing this if they want to maximize on 

tax-free dollars, tax-free growth. I mean, that’s what everyone’s talking about right now is getting money into Roths. But just like with the conversation of Roth conversions, Roth conversions are exciting to talk about, but it’s not for everyone. Everyone’s scenario is a little bit different depending on their income, depending on what their goals are, legacy, all these different things. So, I think this, while it sounds very exciting and kind of a loophole to get money into a place, I think it does need to be evaluated properly. 

for every family’s different types of scenarios so well thanks Taylor for coming on anything else that we didn’t ask or anything else that you want to make sure we do include in this um I don’t think so but yeah I completely agree for your individual situation if you don’t know if after tax makes sense for you don’t know if you should be talking about or considering a backdoor off contribution then that’s a conversation that we can have and we can help you understand where your income is at and what you are eligible for 

And even the actual reporting, if you do go through with one of these strategies to make sure that it gets reported on the tax return and accurately, especially backdoor Roth contributions, I see that get messed up on the tax return often. So, it’s important to not just do the actual contribution, but follow it through all the way to the end of the reporting on the tax return to make sure that it’s all accurate for that part too. Well, very good. Well, thank you again, Taylor. And if you are listening to this and you have any questions, 

feel free to reach out to us. Just go to our website, pomwealth.net. Go to the Contact Us page. We would be glad to hop on a phone call with you. And just to kind of say, hey, is this anything you want to talk about? What’s your situation? Because a lot of times you might just have a question or two, and we’d be glad to help you on that. But we hope you have a great week. We’ll talk to you again next Monday.