The MEG of Retirement Planning Opportunities

It’s the beginning of shark season here in Southern California and what better way to kick it off than to talk about THE MEG of planning opportunities?

The most fun part of planning for my clients is sharing powerful strategies that largely go unnoticed.

The Mega Backdoor Roth conversion is one of my favorite hidden gems — a strategy many have never even heard of, let alone understand how it works.

Over $30-35k a year in tax-free money growth?? Don’t tease me, you say!

I only speak in full truths around here. It’s legit. But there are two catches to Mega Backdoor Roths.

First, they require delayed gratification (duh and true of all retirement accounts).

Second, they can be a hassle to set up and manage, depending on your 401(k) recordkeeper — though some are much easier to work with than others.

Unfortunately, not all companies offer the Mega Backdoor Roth conversion feature. It adds administrative complexity and costs. If your company offers them or you are a solo business owner looking to add a Roth conversion feature to your Solo 401(k) plan, read on!

Before I dive into some scenarios, a little context for who is and is not a fit.

Not a Great Fit

1.  You are not already maxing out your 401(k) contributions for the year.

Mega Backdoors don’t make a lot of sense if you aren’t filling up that $23,500 employee contribution limit. If you are contributing to a Roth 401(k) account and have not hit the limit, the Mega Backdoor consideration is a moot point. Remember, Mega Backdoors are strategies ON TOP OF maxing out your 401(k) contribution limits.[i]

2.  You look to 401(k) contributions for immediate reduction of taxable income.

The tax benefit from Mega Backdoor Roth contributions comes on the backend – when you begin withdrawing from the account not when you contribute.

In order lower your taxable income in the year of your contribution, max out your Traditional (aka pre-tax) 401(k) and, if available, your HSA contributions too.

For business owners, cash balance plans offer even larger tax deferral opportunities but these are complex and should not be done without proper planning.

3.  You want flexible savings

401(k) and IRA accounts are super tax efficient but they come with rules. Try to take money out of them before you turn 59 ½? You are paying income taxes on your distribution + 10% penalty.[ii]

Sometimes a good old-fashioned brokerage account works well for people that are already on track with their retirement savings and would prefer flexible money over tax-efficient, retirement money.

And there are still plenty of ways to create tax efficiency within a taxable brokerage account for your cash needs now and in the years to come before retirement.

Great Fit

1.  You are a high earner

You are maxing out your $23,500 limit and want the scoop on what else is available. If you already have your pre-retirement needs covered by your paycheck and other income sources, you should at least consider Mega Backdoors.

2.  You are playing catch up with retirement saving

You may not have been as disciplined with your 401(k) contributions early in your career to allow for that lonnngggg runway for compounding investment growth. Who among us?

No worries. Mega Backdoor Roth’s are an effective catch-up strategy.

3.  You want retirement account diversification

Perhaps you are maxing out the $23,500 with Traditional 401(k) contributions and want some Roth savings without giving up your Traditional contributions? If executed properly, Mega Backdoor Roth contributions become Roth assets. Master of the obvious, I know.

4.  You are Team Roth through and through

You are already maxing out your Roth 401(k) and want to go all out with more Roth contributions. Why? You don’t mind paying income taxes now on your income and love the idea of those Roth savings compounding with ZERO taxes upon withdrawal in retirement.

How do they work?

1.  Calculate how much wiggle room you have to make Mega Backdoor Roth Conversions

The 2025 $70,000 retirement plan limit applies to ALL contributions: both employee and employer match contributions.

For example, you make $200,000 salary. You max the employee contribution limit of $23,500 and on top of that your employer offers a dollar for dollar match up to 3% of your salary = $6,000.

Your Mega Backdoor wiggle room = $70,000 - $23,500 - $6,000 = $40,500

2.  Withhold after-tax dollars from your paycheck

These aren’t pre-tax contributions so they are indeed taxed and they aren’t Roth dollars… yet. For now, they are simply after-tax contributions and are held in a separate account so they need to be labeled different from your $23,500 contributions.

3.  Convert after-tax contributions to Roth

Once the after-tax contributions are complete, move those funds to the Roth 401(k) account using a form or online portal on your recordkeeper’s website. We can debate the arcane nature in which these companies process requests. Nevertheless, the long-term benefits are worth the headache.

IMPORTANT: Make sure you complete the Roth conversions immediately after the after-tax contribution. If you make the after-tax contribution and convert a few years later, any growth in the after-tax bucket will be taxed upon conversion.

Quick and Dirty Example

Continuing with the employee above, let’s say 30-year-old Clark makes $200,000 and his employer, Shark Shack, matches dollar for dollar up to 3% of his salary.

Clark just discovered Shark Shack offers Mega Backdoor Roth conversions, and he’s now circling the waters. He’s decided to take full advantage of Backdoor Roths for the next 10 years in order to ramp up his retirement savings.[iii]

So 10 years of:

$23,500 in pre-tax, Traditional 401(k) contributions

$6,000 in employer matching contributions

$40,500 in after-tax contributions rolled into a Roth 401(k)

Assuming a diversified all-stock portfolio yielding on average ~8%, what will Clark have in each account based on ONLY these 10 years of saving when he retires at age 65?

Traditional 401(k) = $2,459,516.79

Employer Match = $627,961.73

After-tax contributions rolled into a Roth 401(k) = $4,238,741.69

Remember, the Traditional 401(k) and employer match dollars are taxed at your ordinary income tax rate upon withdrawal.

That ~$4.2M Roth value? TAX-FREE!

Mega Backdoor Roth conversions are one of the most powerful — yet underutilized — tax strategies in retirement planning. If you’re a high earner and/or playing catch-up, it’s worth exploring whether this could give your retirement planning a significant boost.

Chat with your advisor to see if it fits in your plan — or just reach out to me.

[i] $23,500 limit for those under 50 years old. A ‘catch-up” provision = $23,500 + $7,500 for those between age 50 and 59 years old. A “super catch-up”= $23,500 + $11,250 for those 60-63 years of age.

[ii] Certain exceptions apply and the early-withdrawal exceptions are different for IRAs and 401(k)s.

[iii] I’m assuming Clark’s salary and contribution limits are static for 10 years – not the case in real life but useful for illustrative purposes. I’m also assuming no regulatory changes!  

Two Palms Planning LLC, doing business as Two Palms Financial, is a registered investment adviser registered with the State of California. Registration does not imply a certain level of skill or training. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. The information contained herein is based on current tax laws and regulations, which are subject to change. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.