Mega Roths Help Clients Boost Savings, Lower Taxes

As an advisor, there’s a lot you can do to help clients get the most out of their retirement savings accounts.

By Monica Dwyer
Monica Dwyer
Monica Dwyer

In the last two weeks of 2023, I started reaching out to my clients who maximize their savings in defined-contribution retirement savings accounts, such as 401(k)s, 403(b)s and 457s. I wanted to let them know that the limits have increased this year for not only employee contributions but also for total contributions from employee and employer. I also wanted to remind them of one of my favorite strategies — known as the Mega Roth or Super Roth — which can help plan participants boost savings and reduce their future tax outlays.

Helping my clients get the most out of their retirement savings accounts is so important to me, even though I don’t manage their plans. In the U.S., 401(k)s are the most heavily relied-upon savings and investment vehicle. (Employees of non-profits and government agencies — including hospitals, schools/universities and police/fire departments — often have 403(b) or 457 accounts). Traditional pension plans have largely disappeared, and the burden is on most Americans to save for a desired lifestyle that exceeds what Social Security benefits can provide.

The Mega/Super Roth largely remains a hidden opportunity. Although legal since 2014, most plan participants (and some financial advisors) remain unaware of it. The strategy allows 401(k)/403(b)/457 accountholders to make after-tax contributions to their plan that are then converted to either a Roth within the plan or to a Roth IRA outside of the plan.

When used properly, this beauty of Mega/Super Roth contributions is that they are never taxed in the future. This strategy is not the same as a backdoor Roth contribution which is a non-deductible contribution made into a traditional IRA (not into an employer-sponsored retirement plan), then converted to a Roth IRA. We do not address that strategy in this article.

If your client can afford the Mega/Super Roth strategy and their plan allows for it, the time to start is now. Congress has tried but failed to eliminate this strategy, so it is definitely on the radar for future legislation, but as of now it is perfectly legal.

The Basics – Maximizing the Company Match

Before getting into the hidden opportunities of Super/Mega Roths, let’s first look at the obvious: Are your clients taking full advantage of their company’s match?

They may be forfeiting this opportunity if they are not making regular contributions that last throughout the full calendar year. In most cases, 401(k) and other defined-contribution plan participants are allowed to contribute up to $23,000 if they are under the age of 50 by Dec. 31, 2024, or up to $30,500 if they are age 50 or older by that date. Total contributions from employer and employee may not exceed $69,000 for those under age 50 by Dec. 31, 2024.

For example, let’s say Lisa, age 40, earns $125,000 a year (approximately $2,400 a week) and contributes 25% to her 401(k). Her company matches 100% of that contribution up to 6% of her total income. By October she will reach the maximum amount — $23,000 — that the IRS will allow her to contribute this year.

The maximum combined contribution for employee and employer contributions is $69,000. But once Lisa’s contributions stop going into the plan, the company stops contributing as well. She is much better off contributing 18.4% of her $2,400 paycheck for the full calendar year, instead of 25% so that her company contributes for the full year instead of only the first ten months.

‘True-up match’

Some companies offer what is called a true-up match — catching up on employees’ contributions the year following their missed contributions. While this is nice, it isn’t ideal because the matching contributions come in later than they could have if Lisa were to contribute throughout the whole year. The preference is to dollar-cost-average into the market so that a plan participant can capture any potential investment gains.

Don’t forget to advise your clients to re-adjust retirement contributions if any of the following happens after they have set their planned percentages for the year:

  • The employee receives a raise or promotion, affecting their pay.
  • The employee receives a bonus lower or higher than anticipated and planned for.
  • The company changes any of the retirement plan rules that could impact the amounts that the employee is allowed to contribute or the company’s match. (Sometimes this can be the case with company mergers/acquisitions or when plan rules change.)

What are the Super/Mega Roth superpowers?

The Super/Mega Roth is essentially the following:

  1. The participant makes regular contributions to a retirement plan, and their company may match those contributions. These can be done pretax (allowing participants a tax deduction now) or as Roth contributions (allowing participants tax-free distributions in the future) if the plan permits. Think of these regular contributions as one type of contribution and the foundation of any good retirement plan.
  2. The participant makes additional after-tax contributions to the plan. (After-tax contributions are generally not matched by employers, so think of Step 1 as the building block of your retirement strategy and Step 2 as the icing on the cake.)
  3. The participant converts the after-tax contributions to a Roth source within the plan or possibly converts to a Roth IRA outside of the plan. More on those options later.

Note that not all plans allow for Roth contributions, after-tax contributions or even conversions from after-tax to Roth. To determine if this strategy is possible, it will be necessary to find out what the plan rules are. Asking the retirement plan provider or the retirement plan administrator the right questions can help determine what a plan will and will not allow. Note that plans update their rules regularly. If your client is not eligible for this strategy now, check back yearly because plans do adopt new rules. If your client is an executive at the company, you might even suggest that they go to human resources and request the plan rules be changed to allow them to make these types of contributions.

Who benefits from a Super/Mega Roth?

Participants who are most likely to use the Super/Mega Roth strategy fall into three categories:

Super Savers. These are the clients who have savings in their blood. They are always looking for ways to optimize their savings and the Super/Mega Roth is a great way to do it, especially since regular Roth IRA contribution limits are set at $7,000 in 2024, plus a catch-up contribution of $1,000 per year for those age 50+ by December 31st. (Note that Roth IRA contributions are subject to income limits, which can be found here.)

Empty Nesters. These parents have finished raising children who’ve successfully launched into adulthood. Their expenses have decreased, and they are ready to kick their savings into a higher gear and sprint to retirement.

High-Income Earners. High earners can’t put away as big a percentage of their income as lower income earners. Executives, doctors, lawyers and other high earners can use the Super/Mega Roth strategy to shelter more of their income so they can maintain the same standard of living in retirement that they enjoyed while working.

Note that all plans must satisfy testing requirements that confirm highly compensated employees (HCEs) do not disproportionately benefit from retirement plan contributions. Each participant is subject to these rules, and they may end up over-contributing to the plan, in which case they will get refunded without any tax penalty.

Real-World Scenarios

Let’s see how the Super/Mega Roth could help people in different categories contribute more this year to their retirement plans and boost their future tax savings.

John and Terry – Empty Nesters

John, 58, and Terry, 60, are married and would like to retire in five years. They prioritized their children’s needs as they were growing and supported them through college. John and Terry are ready to play catch up with their own retirement and have dreams of traveling and perhaps even owning a condo in a warm-weather locale. They are ready to commit to aggressive savings goals.

Their combined annual income is $350,000 ($175,000 each), which includes their base pay plus expected bonuses. John’s company allows pretax and Roth 401(k) contributions but does not allow after-tax contributions; therefore, he will not be allowed to do a Super/Mega Roth. John decides to max out his contribution to his 401(k) in pretax dollars. Terry has the option to do the Super/Mega Roth in her 401(k), but the plan will only allow her to do an “in plan” conversion. Here is what their savings could look like this year:

John’s total pretax 401(k) contribution limit is $30,500 ($23,000 + $7,500 catch up)

John’s company will match 100% of his contributions up to 4% of his salary ($175,000 x .04) = $7,000. Between John and his company, the total contributions into his 401(k) could be $37,500, well below the total limit of $69,000. Since his company will not allow him to do any after tax contributions, he does not have the Super/Mega Roth option in his plan.

Terry is going to max out her pretax contributions just as John did at $30,500 ($23,000 + $7,500 catch up contributions.)

Terry’s company will match 100% of her contributions for the first 4% of her salary and 50% of the next 4% of her salary, meaning that it will match a total of 6% of her income = $10,500.

How much more can Terry contribute to the after-tax bucket and convert to the Roth in her 401(k), which will allow her to max out her contributions? Use this worksheet:

A. Total Contributions Allowed in 2024$76,500*
B. Terry’s Pretax Contributions:$30,500
C. The Company Match:$10,500
D. Line A minus B minus C =$35,500
*$69,000+$7,500 catch up contribution

For a couple previously not allowed to contribute to a Roth IRA because their income exceeded the annual limit for Roth IRA contributions of $230,000 to $240,000 in 2024, $35,500 is a huge sum to be able to contribute in after tax funds that would then be converted to a Roth for one tax year. Even if they were eligible to contribute to a Roth IRA (based on income), together they would cap out at $16,000 in contributions. This is more than double that amount. They could save even more if John had the Super/Mega Roth available.

Gary and Diane – Super Savers

Gary and Diane work for the same firm. They are in their early 30s and they have always aimed to retire early. They are willing to forgo spending now so that they can reach their savings goals earlier. This year, Gary will earn $155,000 and Diane will earn $110,000. They both believe that taxes will rise in the future and last year they put all their 401(k) contributions into the Roth within their plans. Because their modified adjusted gross income will exceed $240,000 in 2024, they won’t qualify to make Roth IRA contributions.

This year, Gary and Diane are working with a financial advisor who ran a financial plan for them. The advisor determined the couple would be best off, based on the planning assumptions, to put half of their 401(k) contributions into a Roth within their plans and half into a pretax bucket within these plans. Here is the breakdown of how that looks for them:

Gary earns $155,000. His company matches 5% of his contributions. Before this year, Gary and Diane were making all contributions to the Roth source within their 401(k)’s and thus were not eligible to contribute to a Roth IRA because the income limit of $240k.

Note: Eligibility for making Roth contributions is based on a person/couple’s modified adjusted gross income (MAGI). See IRS Publication 590-A, page 39 for a worksheet that shows you what income could be added back in determining MAGI for Roth IRA eligibility.

Gary earns $155,000. His company matches 5% of his income. How can Gary contribute to a Roth if the income limit for 2023 for married filing jointly is $228,000? 

A. Total Contributions Allowed in 2024$69,000
B. Gary’s Contributions:$23,500*
C. The Company Match:$7,750
D. Line A minus B minus C =$38,250
*Gary contributes $11,500 to Roth and $11,500 to pretax 401(k)

Gary is allowed to contribute an additional $28,250 to the after-tax portion of his 401(k) and covert that to the Roth within his plan. 

Diane earns $110,000 and the company’s match is 5%. Let’s calculate her allowable contributions:

A. Total Contributions Allowed in 2024$69,000
B. Diane’s Contributions:$23,500*
C. The Company Match:$5,500
D. Line A minus B minus C =$40,500
*Diane contributes $11,500 to Roth and $11,500 to pretax

Diane is allowed to contribute an additional $40,500 to the after-tax portion of her 401(k) and convert that to the Roth in her plan.

For Gary and Diane, being able to contribute these funds and convert to Roth is a huge benefit above and beyond the standard $7,000 that they would each be able to contribute to a Roth IRA account. Frankly, many people would not be able to afford to contribute this much to their retirement plans.

Here is a simplified breakdown of their anticipated MAGI:

Gary’s income is $155,000 less his pretax contributions of $11,500 = $143,500

Diane’s income is $110,000 less her pretax contributions of $11,500 = $98,500

TOTAL MAGI = $242,000

(For the sake of simplicity, we are assuming no income is generated from their after-tax investments or bank accounts. Clients should consult with their tax advisors before finalizing their strategies.)

Since Gary and Diane’s combined income exceeds $240000, they are not eligible for regular Roth IRA contributions. Gary and Diane are very fortunate because Diane received an inheritance from her family, and they can afford to contribute more. Their financial advisor recommends bumping up their pretax contributions to lower their MAGI to under $230,000. This would also allow them to make full contributions of $7,000 each into their Roth IRA accounts.

Gary and Diane need to continue to work with their financial advisor and tax advisor to ensure they are contributing enough pre-tax funds to their 401(k)s to qualify for the Roth IRA in future years as their income, the income limits, and the maximum retirement plan contribution limits change.

Drs. Fred and Frankie – High-income earners

Drs. Fred and Frankie met when they were in residency together. They are heart specialists and are high-income earners. Fred works as a cardiologist for a private practice and earns $300,000 per year. The private practice does an automatic 3% match into a 401(k) of his salary regardless of whether he puts money into his retirement account or not. Frankie works as a cardiothoracic surgeon for a hospital and contributes to a 403(b) account. She will earn $340,000 this year and is entitled to a pension; therefore, the hospital does not contribute to her 403(b) account.

Fred and Frankie are both in their late 50s and are looking for a way to shelter as much money as possible from future taxation. Based on their savings rate and growth in their investments, they anticipate that their tax bracket will remain high in retirement.

The couple files their taxes jointly and neither spouse qualifies for a Roth IRA based on income.

Fred’s 401(k) plan allows him to do the Super/Mega Roth strategy within his plan. Here is what his contributions could look like for 2024:

A. Total Contributions Allowed in 2024$76,500
B. Fred’s Pre-Tax Contributions:$30,500*
C. The Company Match:$9,000
D. Line A minus B minus C =$37,500
*Fred and Frankie decided to make all pretax contributions. Fred’s $30,500 contribution includes regular and catchup contributions.

Fred likes the idea of putting an additional $37,000 into the Roth bucket of his 401(k) account (through the Super/Mega Roth strategy), but he really likes investing in individual stocks. Fortunately for Fred, his 401(k) plan allows him to do a conversion/rollover into his Roth IRA — a brokerage account where he can trade individual stocks. Always check the plan rules to be sure that there is no penalty when doing the after-tax rollover/conversion!

Frankie also wants to put in as much as possible into a Super/Mega Roth, and her plan allows it. So, Frankie does the following:

A. Total Contributions Allowed in 2024$76,500
B. Frankie’s Pre-Tax Contributions:$30,500
C. The Company Match:$0
D. Line A minus B minus C =$46,000
*Fred and Frankie decided to make all pretax contributions. Frankie’s $30,500 contribution includes regular and catchup contributions.

Because Frankie’s hospital doesn’t offer a match, she can contribute more after-tax dollars to her 403(b) and then convert to Roth than her husband can. She would prefer to take this contribution and roll it into a Roth IRA outside of the plan to get more investing options, but that is not available in her 403(b) account.

A Few Important Details

There’s a lot more to know about Super/Mega Roths. Here are some basics:

Automatic in-plan conversions

Some retirement plans allow automatic in-plan conversions. That means that as soon as money goes into the after-tax bucket, it is immediately converted to Roth. The benefit is there is no growth of those after-tax funds prior to conversion.

If a retirement plan doesn’t allow for automatic after tax to Roth conversions and the after-tax funds have grown since contributing to the plan, the plan may allow one of two other things:

  1. The participant can convert the growth on the after-tax funds and pay taxes in the year they do the conversion.
  2. The participant may be able to leave the growth from the after-tax funds in the pretax source of the plan and convert the after-tax contributions to Roth, avoiding any additional taxation for the current calendar year. Doing more frequent, or better yet, automatic conversions of the after-tax money will minimize or eliminate this issue.
Keeping the Roth in a retirement plan vs. an IRA

Some investors or advisors prefer the investing options of a Roth IRA brokerage account to the limited investments in a participant’s retirement plan. In that case, if the plan rules allow it, they can convert and roll over the after-tax money instead of leaving it in the plan. Keep in mind that any other legal or cost advantages of keeping money in the retirement plan — such as federal protection from lawsuits, lower fee mutual funds, or guaranteed investment contracts (GIC’s) that are available in the plan — may not be available in a Roth IRA. Check the laws of your client’s state of residence and the retirement plan options to make the best decision.

Separate designations may be available

Some companies have a separate designation for withholding from regular paychecks vs. bonus checks. This can be nice if you are trying to manage a client’s cash flow. For example, if the client doesn’t normally use their bonus money for essential living expenses, they can make a larger contribution from their bonus into the retirement plan so their goals are met without hampering their regular cash flow.

Do your homework

Please refer to this list of important questions. Most clients wouldn’t feel comfortable asking the provider all these questions. Calling the provider with your client on the phone so that you can keep a record of the provider’s answers can be a great service for your clients.

Since plans change their rules from year to year, it wouldn’t hurt to call periodically to see if there are any updates. Also see this flowchart for additional details.

Avoid plan penalties

Make sure that any conversions of after-tax funds to an outside Roth IRA will not trigger a penalty by the plan. Penalties usually preclude the client from being able to contribute to their plan for a specific period. So not only does the client miss out on their contribution, but they also miss out on matching contributions for that period.

New requirement in 2026 for high earners age 50+

Starting after December 31, 2025, any individual age 50+ who earned more than $145,000 in the prior calendar year (adjusted for inflation) who wishes to make catchup contributions will be required to make those contributions as Roth contributions instead of as pretax contributions. Originally this was set to begin in 2024; however, the IRS has issued guidance pushing that out two years as plan providers need time to adapt their technology and systems.

Monica Dwyer, CFP, CDFA, is a licensed investment adviser representative  with Harvest Financial Advisors, LLC in the Cincinnati/West Chester, Ohio area. She may be reached at [email protected]. This article is for informational purposes only. Any commentary and third-party sources are believed to be reliable but Harvest Financial Advisors cannot guarantee their accuracy. 

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