The type of employee with the income to take advantage of this technique typically adds a lot of value to the organization. If you’re an HR or benefits officer looking to attract that type of talent, you may want to consider advertising your ability to accommodate mega backdoor Roths.

Which employees benefit from a mega backdoor Roth?

The mega backdoor Roth won’t appeal to everybody. Here’s the criteria someone has to meet for this technique to work:

• The employee earns an annual modified adjusted gross income (MAGI) greater than $139,000 (if filing taxes as a single) or $206,000 (if married filing jointly). Anyone claiming less than this on their taxes could just open a Roth IRA without having to using the backdoor method. (Please note that the amount of the employee after-tax contributions to a 401(k) that a highly compensated employee may make may be limited by required testing.) 
• The employee has already maxed out their 401(k) account and still has more money they’d like to save. The IRS sets the 2021 employee salary deferral contribution limit for 401(k)s at $19,500.
• The 401(k) set up by you, the employer, allows for after-tax (non-Roth) contributions and in-service distributions of after-tax contributions (so the employee can roll over the funds into the mega backdoor Roth). 

While the first two criteria depend on the high-earning individual, the plan design of the 401(k) plan depends on your organization. You can easily amend your 401(k) plan to allow for a mega backdoor Roth. But if your plan already allows for it, informing interested employees allows you to provide an additional incentive without much effort on your part.

A step-by-step guide to the mega backdoor Roth

Because employers can’t directly manage the retirement funds of their workers, most of the burden for pulling off a mega backdoor Roth falls on the interested employee’s shoulders. But you can still help guide the employee through the process, which is why you should know what they have to do to successfully create a backdoor mega Roth.

1. Max out 401(k) pre-tax (or Roth) contributions. In 2021, the maximum amount an individual can contribute to a 401(k) on a pre-tax (or Roth combined) basis (meaning they won’t pay taxes until distribution of the funds) is $19,500. This does not include any employer match or other employer contributions. The employee should first hit this limit. 
2. Make post-tax contributions to the 401(k). While the IRS limits individual pre-tax contributions to $19,500, the employee and employer combined can contribute up to $58,000 (in 2021) to the 401(k). To figure out how much money the employee can contribute to the post-tax portion of your 401(k), subtract the amount of their pre-tax contributions and whatever the employer has contributed from $58,000. For example, if the employee contributes the full $19,500 and the employer match contributes a generous $9,000, that means the employee can contribute $29,500 to the after-tax portion of the 401(k) [$58,000 - $19,500 - $9,000 = $29,500]
3. Quickly roll the post-tax 401(k) contributions into a Roth. As a reminder on the basics of retirement savings accounts, a Roth (whether IRA or 401((k)) allows money to grow tax-free. However any growth that occurs from funds in the post-tax portion of the 401(k) will be taxed, so the employee will want to get their money from the 401(k) into the Roth account as quickly as possible before it starts earning taxable income.
4. Choose which type of Roth account to sweep the money in. If you, the employer, offers an in-service Roth rollover option as part of your 401(k) plan, the employee could opt to make the mega backdoor Roth contribution through the 401(k). This has the advantage of simplicity and keeping all of the funds together. However, if your plan allows for in-service distributions from the after-tax account, rolling the money into their own Roth IRA allows your employees to eventually receive tax-free withdrawals, similar to the Roth rollover account in a 401(k). It’s a choice between convenience and ease of access.