I hear lots of people say they do this but it has different meanings to a lot of people.

Level 1. Maxing out the employer match
Level 2. Maxing out the 22.5k pretax or Roth limit
Level 3. Maxing out the 66k employee/employer limit for pretax/Roth/after-tax (bonus points for Roth converting the after tax portion)

I think most people in the real world who claim to max their 401k mean Level 1, I suspect most on this board means Level 2.

I'll be one to admit that I wasn't tuned into the benefits of a 401k for most of my 20's and fell into category 1. Then I sat down with financial planners when I got married and became a category 2/3.

It's such an OP financial move for those who can do it. It's not quite triple tax advantaged like an HSA, but it's incredibly powerful to have gains you'll never pay tax on.

Everyone whose employer allows them should be doing a mega backdoor.

Brian Earl Spilner said:

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It's such an OP financial move for those who can do it. It's not quite triple tax advantaged like an HSA, but it's incredibly powerful to have gains you'll never pay tax on.

Everyone whose employer allows them should be doing a mega backdoor.

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I'm with Chris1515, I really need to read this board more often as I wasn't aware of the #3 66K limit.
I'm assuming the mega backdoor Roth is what this means if I check the box on my 401k account that says "If I reach the pretax/Roth IRS limit, carry over my contributions to after-tax" ?

So, I have questions…

First some context on retirement accounts. I have:
- A traditional IRA (rollover from a previous employer 401k) that I still contribute $6500 each year to post tax (do the brokerage firms keep track of post tax for you? Realized I need to start doing this…)
- A Roth IRA that I can no longer contribute to because of the AGI income limit
- A 401(k) from a previous employer I never bothered to roll over into the traditional IRA because of issues handling the rollover during COVID
- A 401(K) with my current organization that will hit the pre-tax contribution limit in 2023
- Spouse's 401(K) with their current organization that will hit the pre-tax contribution limit in 2023

Questions:

1) If I do the employer mega backdoor Roth, does the employer plan typically track the pretax vs post tax differences for you on your W2 so that you remain within the pretax limit, or do you the individual have to track this yourself?

2) I'm assuming the 66K maximum employee and employer pre and post tax contribution 401K limit is for each specific 401(k) plan. I'm assuming this applies for each spouse if married filing jointly and is not considered together. No other IRA contributions or other 401K accounts you have outside of this specific 401(k) plan between you and your employer is subject to the $66K limit.
That sound right?

3) Is it the opinion of most on this board to maximize your HSA contributions before going down the path of employer mega backdoor?

4) How do you track your pre and post tax contributions? This can get complicated quickly with all the different retirement accounts we have so looking for best practices.

5) I'm assuming if you do the 401(K) mega backdoor Roth, those employer matches continue even after the pre-tax contribution limit is hit?

Thank you

Ghost of Bisbee said:

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Brian Earl Spilner said:

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It's such an OP financial move for those who can do it. It's not quite triple tax advantaged like an HSA, but it's incredibly powerful to have gains you'll never pay tax on.

Everyone whose employer allows them should be doing a mega backdoor.

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I'm with Chris1515, I really need to read this board more often as I wasn't aware of the #3 66K limit.
I'm assuming the mega backdoor Roth is what this means if I check the box on my 401k account that says "If I reach the pretax/Roth IRS limit, carry over my contributions to after-tax" ?

So, I have questions…

First some context on retirement accounts. I have:
- A traditional IRA (rollover from a previous employer 401k) that I still contribute $6500 each year to post tax (do the brokerage firms keep track of post tax for you? Realized I need to start doing this…)
- A Roth IRA that I can no longer contribute to because of the AGI income limit
- A 401(k) from a previous employer I never bothered to roll over into the traditional IRA because of issues handling the rollover during COVID
- A 401(K) with my current organization that will hit the pre-tax contribution limit in 2023
- Spouse's 401(K) with their current organization that will hit the pre-tax contribution limit in 2023

Questions:

1) If I do the employer mega backdoor Roth, does the employer plan typically track the pretax vs post tax differences for you on your W2 so that you remain within the pretax limit, or do you the individual have to track this yourself?

Yep, employer tracks this. But shouldn't matter because you should be able to control how much of your paycheck you want to contribute pre and after tax, independent of each other.

2) I'm assuming the 66K maximum employee and employer pre and post tax contribution 401K limit is for each specific 401(k) plan. I'm assuming this applies for each spouse if married filing jointly and is not considered together. No other IRA contributions or other 401K accounts you have outside of this specific 401(k) plan between you and your employer is subject to the $66K limit.
That sound right?

The $66k limit is for ALL your combined 401k contributions, + employer match.

3) Is it the opinion of most on this board to maximize your HSA contributions before going down the path of employer mega backdoor?

Definitely max your HSA first, since that is pre-tax. The mega backdoor is basically the last, "bonus" bucket if you are still able to contribute to retirement.

4) How do you track your pre and post tax contributions? This can get complicated quickly with all the different retirement accounts we have so looking for best practices.

Your 401k plan should track this. Fidelity does this for me.

5) I'm assuming if you do the 401(K) mega backdoor Roth, those employer matches continue even after the pre-tax contribution limit is hit?

I assume those would still only go up to the company limit, regardless of any after-tax contributions.

Thank you

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But the real trick here is to ensure that you can convert your after-tax contributions to Roth. Furthermore, your employer may allow for an in-plan conversion, such that your after-tax contributions are immediately converted to Roth the second they go in, so you avoid ANY tax hit on cap gains for all qualified withdrawals.

Thank you for this. Very helpful

Why do you have to convert the after tax contributions to Roth after already hitting the pre-tax $22,500 limit? I thought those were already considered Roth and therefore no longer taxable once withdrawn

Or are you saying that the plan holder needs to do the conversion on the after tax contributions to Roth so that there is a clear difference between what you and your employer contributed that counts toward pre-tax vs what you and your employer contributed that counts toward post-tax?

The after tax contributions would be converted to Roth IRA contributions once you have already paid tax on them when entering the 401k. At that point any earnings of those conversions are tax free within the Roth IRA.
Any earnings on the after tax 401k contributions while in the 401k are tax deferred so when they are mega backdoored, they have not been taxed, therefore they will convert to traditional IRA contributions. They now can grow tax free until withdrawn from the ira in the future.

I do Level 3, my companies 401k program is likely the best in America. Better than anything I've ever heard of at least.

I'm curious if I can do better though like yall describe with this super back door. Might need a better explanation to understand if it's possible with my plan.

Just fyi...you can still contribute to your Roth IRA via the backdoor regardless of AGI

DouglasPearce said:

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Just fyi...you can still contribute to your Roth IRA via the backdoor regardless of AGI

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How?

Ghost of Bisbee said:

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DouglasPearce said:

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Just fyi...you can still contribute to your Roth IRA via the backdoor regardless of AGI

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How?

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Just contribute to your regular IRA like normal, up to $6500 in 2023. Then set up a Roth IRA (which it already sounds like you have one), and transfer the funds from your regular IRA into your Roth IRA.
If you have funds in your regular IRA from previous years you will owe taxes on that conversion into your Roth, this is called the pro rata rule.
Try googling The Backdoor Roth IRA and you'll find great info on the process.

Yea that's the problem, can I do a partial backdoor from the traditional it's? Otherwise I'm paying quite a lot in taxes now that I don't want to do

Hudson2508 said:

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I do Level 3, my companies 401k program is likely the best in America. Better than anything I've ever heard of at least.

I'm curious if I can do better though like yall describe with this super back door. Might need a better explanation to understand if it's possible with my plan.

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What's your match rate? I assume that's what you are referring to. My former employer's was really good so curious what you have.

Ghost of Bisbee said:

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Yea that's the problem, can I do a partial backdoor from the traditional it's? Otherwise I'm paying quite a lot in taxes now that I don't want to do

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I was gonna add that in my last post. If you have quite a bit in your traditional IRA, it may be best to just continue down the road you've been on to avoid paying taxes due to the pro rata rule.

When I say it, I'm referring to the $66,000 limit for this year.

Hudson2508 said:

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I do Level 3, my companies 401k program is likely the best in America. Better than anything I've ever heard of at least.

I'm curious if I can do better though like yall describe with this super back door. Might need a better explanation to understand if it's possible with my plan.

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If you are contributing after tax after you hit he 22.5 and not Roth converting it you will owe tax on the gains they make between and now and the time you withdraw it (or Roth convert it). Some plans allow you to roll the after tax portion out to a Roth account and pay a one time tax on the gains so far (if there are any) or convert it to Roth inside the plan to avoid paying taxes on the gains in the future.

RightWingConspirator said:

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When I say it, I'm referring to the $66,000 limit for this year.

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Only about 20% of 401k programs offer this though which is why most people refer to level 2 when they say "maxing it".

Ghost of Bisbee said:

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DouglasPearce said:

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Just fyi...you can still contribute to your Roth IRA via the backdoor regardless of AGI

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How?

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Backdoor Roth IRA. Contribute to Trad IRA and then convert to Roth. Its really easy with Vanguard.

https://investor.vanguard.com/investor-resources-education/article/how-to-set-up-backdoor-ira

Re the mega backdoor Roth contributions - you need to call your 401k administrator to see exactly how to do this.

My plan is with Fidelity, and it's not so simple as checking the box saying you want to do after tax contributions (that will likely just go straight into your "normal" 401k as an after tax contribution).

I had to call Fidelity and tell them I specifically wanted the mega backdoor Roth. The reason why is because they actually are a rollover. You won't really see it in your account, as it all happens behind the scenes, but that's why the in-service distribution has to be allowed by your employer. Now that I have the account set up, I can change my contributions online, but the initial set up had to be done by speaking to a Fidelity rep in order to be set up correctly.

With mine, I also cannot allocate the mega backdoor Roth contributions. They go into the investments that are part of my pre-tax 401k. I guess maybe I could do some conversions after the fact, but the whole point for me is to have someone else keep track of what's pre-tax and post-tax. Fidelity does all this behind the scenes, and at quick glance you will probably just see your existing 401k account grow. I can drill down into my account statements to see the details, but my "dashboard" looks no different than it did before I set up the mega backdoor Roth.

Hudson2508 said:

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18% match on a 4% contribution.

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That's awesome. My company does a 10% match on 5% contribution.

txaggie_08 said:

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Hudson2508 said:

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18% match on a 4% contribution.

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That's awesome. My company does a 10% match on 5% contribution.

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What would you say is the typical rate at most corporations? I've only ever worked for smaller companies, but they have always done around a 50% match up to 4-6% contribution (three different businesses), just surprised to see that's not the norm. Or am I misunderstanding something?

It's varied widely for me. First company matched 100% of your contributions, so whatever percentage you put in they'd match. Other companies may have only matched up to 6% of my salary. This is the first company that could theoretically contribute more than me with the 2-1 match up to 10% of salary.

I would say the most common, from anecdotal experience, is 100% match for 1-3% and 50% match for 4-5%. So put in 5% and they'll contribute 4%.

My current company matches 100% up to 8%. They also do a separate retirement account at 6%, we don't put anything into this one. So if I put 8% in my 401k, they'll be contributing 14%.