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Little-Known Retirement Savings Hack High Earners Need to Learn in 2024

This trick allows you to save tens of thousands more in your retirement accounts.

High earners may have what is called a “quality problem.”

The problem is that they earn so much that they can save a lot of money, but the $23,000 contribution limit for a 401(k) and the $7,000 limit for an IRA is not enough to meet their retirement savings capabilities. Having so much savings that you have to open a taxable brokerage account just to invest it is a big deal.

But there may be a way for high earners to save even more in their tax-advantaged retirement accounts. A little-known hack could allow you to save up to an extra $46,000 in your 401(k) or Roth IRA in 2024. It’s called the Roth mega backdoor.

This option is not available to everyone and you need to be able to save a lot of money to really take advantage of it. But it could unlock some supercharged savings for high earners. Here’s what you need to know.

A piggy bank sitting on top of piles of cash.

Image source: Getty Images.

Opening the large back door

If you earn above the income limits to contribute directly to a Roth IRA, you may be familiar with the backdoor Roth IRA. The mega backdoor works in a very similar way, but uses the 401(k) and some special rules.

Here’s a quick recap of the typical backdoor Roth IRA. If you are not eligible to contribute to a Roth IRA, you can still make a nondeductible contribution to a traditional IRA. You won’t get a tax break, but you can immediately convert those funds to a Roth IRA, which is effectively the same as contributing directly to a Roth IRA.

With a mega backdoor Roth, you’ll take advantage of a little-known rule in the IRS code that specifies the limit on total contributions to a 401(k) (or other defined contribution retirement plans). Total contributions include your regular payroll deductions, the employer match, and a special type of employee contribution known as after-tax (non-Roth) contributions. For 2024, the total contribution limit is $69,000. Those age 50 and older can also make a catch-up contribution of $7,500, raising the total limit to $76,500.

Not every plan allows for additional after-tax contributions, so this will be the first hurdle in accessing the mega-backdoor strategy. Read your plan carefully or message your HR department to see if your plan allows this.

If your plan allows additional after-tax contributions, you’ll also need to be able to convert those funds into a Roth account. This could be either a Roth account within the 401(k) plan or a separate Roth IRA. Some plans may allow one and not the other.

The latter is ideal because IRAs have more investment options and can avoid the fees associated with most 401(k) plans. To perform a Roth IRA conversion, your plan must allow “service withdrawals.” Check your plan for that language or ask HR.

In total, if you can access the mega Roth backdoor, you could add up to $46,000 to your retirement accounts in 2024. This can lead to a comfortable retirement.

Mega backdoor Roth benefits for high earners

Without access to the mega Roth backdoor, excess retirement savings will have to go into a regular taxable brokerage account.

A Roth account is preferable to a taxable account for retirement savings. The big benefit is that you won’t pay any capital gains tax on your Roth account investments. You also won’t pay any tax on annual dividends or interest income, which can add to your tax bill while you work.

Also, keeping savings in a Roth retirement account could help your child qualify for more financial aid for college. Assets in a retirement account will not count on the FAFSA, but assets held in a taxable brokerage account will. This could reduce the burden on you or your child when it comes to paying for college.

There are a few downsides to the Roth mega tailgate though. Because retirement accounts are designed for retirement, you won’t be able to access earnings from your savings without penalty until age 59 1/2. This could be problematic for a high earner who saves a large percentage of his salary. You may be planning to retire early.

You can withdraw up to the amount you contributed from a Roth IRA without tax or penalty before this age. However, early withdrawal of earnings is subject to a penalty of 10% plus income tax on the amount withdrawn.

If you keep your money in a Roth 401(k), be warned that early withdrawals are proportional to contributions and earnings, meaning you can’t even avoid an early withdrawal penalty. If you retired early, you should be able to roll over that Roth 401(k) to a Roth IRA first to avoid this situation. In this case, be aware of the five-year rule, which requires you to have a Roth account open for five years before you can withdraw tax-free.

If you have access to the mega backdoor Roth and the savings to fund it, it usually makes a lot of sense to do so. The tax savings and protections they provide can help you reach retirement sooner or ensure you have more money when you decide to quit.

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