Think of much further your retirement income would go if it was tax free? We share how to get … More
gettyTaxes are often one of the biggest expenses retirees incur. With our progressive tax system, theoretically, the more you make, the more taxes you must pay. One of the biggest exceptions is income in your Roth IRA. Keep reading as we share how you can save $70,000 or more in this type of retirement account every year. This retirement income strategy could make you a Roth IRA millionaire.
Picture your parents or grandparents complaining about the huge amount of taxes they are stuck paying on their IRA distributions and how this level of taxable income increases their Medicare premiums and tax on other capital gains each year. This may lead you to want to increase the amount of tax-free retirement income you have in retirement.
Another popular motivation to Rothify your retirement income is those who are paying attention to the national debt and government deficit spending. President Trump has made many campaign promises to many people, which will be hard to include in his big, beautiful tax bill, which Republicans are working on as I write this post. Any of these enacted cuts will increase the deficit and government debt.
At some point, some or all of this debt will come due, and taxes will have to go up. While you may hate to hear it, the more income you have, the more of that tax bill you may end up paying at some point in the future. While I don’t have a crystal ball and can’t guarantee where tax brackets and rates will be when you hit peak retirement income, I know we are at or near historic low tax rates even before the promised Trump tax plan in 2025.
Mega Backdoor Roth Plus Roth 401(k) Contributions
Most 401(k) plans allow you to make Roth employee contributions now. This money will go in post-tax, so you won’t get a tax deduction, but the money will grow tax-free and come out tax-free, assuming you follow a few Roth IRA rules. For 2025, Roth 401(k) employee contributions are capped at $23,500. This jumps to $31,000 if you are age 50 or older. There is an additional catch-up contribution if you are in the age range of 60-63.
Regular Roth 401(k) contributions are great, but I know many of you want to save even more to generate the maximum amount of Roth tax-free retirement income. Some fabulous 401(k) plans offer the option to make additional after-tax contributions to your traditional 401(k). As a supersaver, this allows you to contribute nearly three times as much to your 401(k). For 2025, you could potentially have $70,000 go into your 401(k)s between your contributions and any employer matching or profit sharing. That number jumps to $77,500 if you are 50 or older.
If your employer offers the mega back door options, almost all of this could end up in the Roth portion of your 401(k). Only your employer’s profit sharing, safe harbor and matching contribution must go into the traditional 401(k) account.
Better Than The Rich Person Roth
I recently had someone with a few million dollars of income ask me why they should bother with the mega backdoor Roth strategy when they could just do a Rich Person Roth with life insurance. The short answer is the cost of insurance and often limited investment options in the Rich Person Roth.
In this particular case, it made the most sense for this person to max out their 401(k) between their contributions and mega backdoor Roth, adding in a Cash Balance Plan against their self-employment income and then funding the Rich Person Roth with the additional funds they wanted to invest for future tax-free retirement income.
Check out the previous article for more information on the Rich Person Roth.
Who Can Use The Mega Backdoor Roth?
If you are self-employed, you can set up your own 401(k) plan with the option to use the mega backdoor Roth strategy. If you are a W2 employee, you must ask your 401(k) provider if they allow for after-tax contributions. If you are saving less than the $23,500 401(k) employee limit, keep it simple and contribute to the Roth 401(k) first.
How Do After-Tax Contributions To Your 401(k) Work?
After-tax contributions to your 401(k) differ from just making Roth IRA or Roth 401(k) contributions. Still, the result can be similar if you use the mega backdoor Roth strategy.
You should start with having your regular employee contributions of $23,500 from your salary go directly into your 401(k) or Roth 401(k) retirement accounts. If you are concerned about current taxes, you can do a combination of pre-tax and after-tax contributions to your 401(k) each year.
Hopefully, your 401(k) plans offer the option to make additional after-tax contributions to your traditional 401(k). This allows you to save well beyond the $23,500 cap. For 2025, you could potentially have $70,000 go into your 401(k)s between your contributions and any employer matching or profit sharing. That number jumps to $77,500 if you are 50 or older. If you are within the age range of 60 to 63, an additional catch-up contribution is available.
This could grow into a substantial tax-free retirement income quite quickly.
How Long Will It Take To Become A Roth IRA Millionaire?
You may dream of financial freedom and millions of dollars in tax-free retirement income from an optimized Roth IRA strategy. How quickly can you become a Roth IRA millionaire when maxing out your mega backdoor Roth 401(K)? Assuming contributions of $70,000 per year with 10% average market returns, you could be a Roth IRA millionaire in as little as 9.5 years or even faster if you have other Roth IRA assets or add in Roth conversions.
Most people can’t save $70,000 per year. Luckily, most don’t need to save this much, annually, to retirement comfortably. For those who are able to save in this range or beyond, the tax-planning opportunities are huge. When you consider that a regular Roth IRA has a $7,000 limit in 2025 and is restricted to those with income below certain thresholds, getting $70,000 into a mega backdoor Roth looks awfully appealing for the right investors.
Taxes will often be your biggest expense in retirement. Having a proactive strategy to minimize the taxes on your retirement income can greatly reduce your chances of running out of money in retirement. Like most things in the financial world, the earlier you get started, the more options you will have, and the bigger the benefits will be.
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