There's a retirement loophole that lets everyday workers stash away tens of thousands of dollars a year into a tax-free account, far beyond the standard 401(k) limit, and most people have never heard of it.
It's called the mega backdoor Roth, and for those who can access it, the payoff can be enormous.
The normal 401(k) contribution limit for 2024 is $23,000, with a catch-up of $7,500 if you're 50 or older.
But the total amount that can go into a 401(k) from all sources — you plus your employer — is $69,000, or $76,500 with catch-up.
If your plan allows after-tax contributions and in-service withdrawals, you can funnel extra money in and convert it to a Roth, where it grows tax-free and comes out tax-free in retirement.
The catch is that your employer's plan has to permit it.
According to retirement researchers, only about a third of 401(k) plans offer the after-tax contribution feature, and fewer still allow the automatic conversions that make it painless.
If you work for a large company or a tech firm, your odds are better.
If you're at a small business, you may be out of luck.
For high earners who've been locked out of regular Roth IRAs because of income limits, this is one of the few remaining doors.
A married couple earning $300,000 can't contribute directly to a Roth IRA.
But if one spouse's 401(k) allows it, they could potentially move $40,000 or more a year into tax-free growth.
Over a decade, that's a half-million dollars compounding without the IRS taking a cut.
First, call your plan administrator and ask two questions: Do you allow after-tax contributions, and do you allow in-service withdrawals or in-plan Roth conversions?
If the answer to both is yes, you're in business.
Then you set your contribution percentage high enough to hit the after-tax limit, and either convert the money immediately or let it roll into a Roth sub-account if your plan supports it.
If you let after-tax money sit too long before converting, the earnings on it become taxable when you move them.
Converting right away — or automating it — keeps the tax bill near zero.
Some plans even offer a "Roth in-plan conversion" that does this for you automatically every pay period.
One warning: if you have a traditional IRA with pre-tax dollars, the pro-rata rule can complicate things.
That rule looks at all your IRAs together and can make part of your conversion taxable.
Many people roll old IRAs into their 401(k) first to sidestep this, though not every plan accepts incoming rollovers.
This isn't a trick for the ultra-wealthy only.
A disciplined saver in their 30s who maxes this out for 20 years could retire with a seven-figure tax-free balance.
The tax savings alone can run into six figures over a career.
The mega backdoor Roth won't work for everyone, and it shouldn't replace an emergency fund or paying off high-interest debt.
But if you've maxed out your regular 401(k) and still have money to invest, it's worth a phone call to your plan administrator.
Final Thoughts
The worst outcome is they say no — and you've lost nothing but a few minutes.