Saving for retirement is a critical aspect of financial planning. While traditional retirement accounts like 401(k)s, 403(b)s and IRAs offer valuable tax advantages, they come with contribution limits that may not be sufficient for physicians with substantial incomes.

This is where the “mega backdoor Roth contribution” comes to the rescue. In this post, we’ll explore how physicians, including self-employed and locum tenens doctors, can harness this strategy to supercharge their retirement savings.

Key Points

  • With an attending physician salary, you can fill up your tax-advantaged retirement buckets pretty quickly. This can leave you searching for other types of accounts and investments to continue saving for your retirement needs.
  • The Mega Backdoor Roth can help you contribute up to an additional $43,500 to Roth retirement accounts. Since these are Roth funds they grow tax-free and withdrawals are also tax-free.
  • The Mega Backdoor Roth is also a great option for self-employed physicians, such as practice owners or locums physicians, to save more for retirement.

What is a Mega Backdoor Roth?

Most physicians have heard of the backdoor Roth IRA before, but what is the Mega Backdoor Roth? With the regular backdoor Roth strategy, you make after-tax contributions to your traditional IRA and then execute a Roth conversion to convert those funds to a Roth IRA.

With this strategy you are limited to the annual IRA contribution limit, which is $6,500 for 2023. The mega backdoor Roth allows you to execute essentially the same strategy using your 401k in place of your IRA. Since 401(k)s have much higher contribution limits and no income limits this allows you to supercharge your retirement savings.

How the Mega Backdoor Roth Works

  1. Max Out Your Pre-Tax 401(k) Contributions: Start by contributing the maximum allowed amount to your traditional 401(k). In 2023, the annual limit for employee contributions is $22,500, with an additional $7,500 catch-up contribution for those aged 50 and older.
  2. After-Tax 401(k) Contributions: Some 401(k) plans permit after-tax contributions beyond the pre-tax limit. This provision is required for the mega backdoor Roth to work, so check with your employer to make sure your 401k allows after-tax contributions.

In 2023, the overall contribution limit for all contributions (including employee and employer contributions) is $66,000 or 100% of your income, whichever is less. This means you can potentially contribute a significant amount of money on an after-tax basis.

For an example, if you contribute the maximum of $22,500 to your 401k and your employer contributes a flat match of $5,000 you could make additional after-tax contributions of $38,500.

$22,500 employee contribution + $5,000 employer match contribution + $38,500 after-tax contribution = $66,000 contribution limit

  1. In-Plan Roth Conversion: Once you’ve made your after-tax contributions, your plan may allow you to convert these funds to a Roth 401(k) within the same plan. Since these were after-tax contributions there is no tax associated with the Roth conversion. This is the critical step that turns your after-tax contributions into tax-free Roth assets.

Some plans may not allow in-plan Roth conversions and may instead allow in-service withdrawals. In this case you would roll your after-tax contributions into a Roth IRA outside of your retirement plan.

In the case where your 401k allows you to make after-tax contributions but does not allow in-plan conversions or in-service withdrawals you should still consider making after-tax contributions. Even though it is not as advantageous as a plan that allows in-plan Roth conversions.

When you retire or leave your employer you can roll your after-tax 401k into an IRA at that time. Your after-tax contributions will roll into a Roth IRA, but any growth will be treated as pre-tax dollars and rolled into a traditional IRA.

Example: You contributed $20,000 to your after-tax 401k which grew to $25,000. You decided to leave your employer and do a rollover of your 401k into an IRA. Your $20,000 of contributions would roll into a Roth IRA. The $5,000 of gains would roll into a traditional IRA.

Benefits of a Mega Backdoor Roth Contribution

  1. Tax-Free Growth: One of the primary benefits of the mega backdoor Roth is that once your contributions are converted to Roth, they grow tax-free. This can be especially advantageous for high-income individuals who anticipate being in a higher tax bracket in retirement.
  2. No Income Limits: Unlike traditional Roth IRA contributions, there are no income limits for the mega backdoor Roth strategy, making it accessible to high-earning physicians.
  3. Higher Contribution Limits: Compared to the regular backdoor Roth you can contribute over 6 times as much to your after-tax 401k, helping to supercharge your retirement savings.
  4. Estate Planning: Roth IRAs can offer excellent estate planning benefits, as they can be passed on to heirs tax-free.

Utilizing the Mega Backdoor Roth for Practice Owners, Self-Employed, and Locum Physicians

Being a self-employed physician can be an outstanding career choice for many doctors, but can have the unfortunate downside of losing access to employer retirement plans such as 401(k)/403(b)/457(b) plans.

Self-employed physicians, whether they are practice owners, 1099 emergency docs or locum tenens physicians, have a unique opportunity to implement the mega backdoor Roth strategy using a Solo 401(k). Here’s how:

  1. Open a Solo 401(k): Self-employed individuals can set up a solo 401(k), also known as an individual 401(k) or one-participant 401(k). This plan allows for both employer and employee contributions, crucially including after-tax contributions.

* You will want to make sure your solo 401(k) plan allows for both after-tax contributions and in-plan Roth conversions to maximize the benefits of the mega backdoor Roth. *

  1. Maximize Contributions: As both the employer and employee, you can contribute up to the annual limits mentioned earlier, including after-tax contributions.
  2. In-Plan Roth Conversion: Execute your in-plan Roth conversions to maximize the benefits of your after-tax contributions.

Wrap Up

The mega backdoor Roth contribution is a powerful tool for physicians looking to supercharge their retirement savings and enjoy tax-free growth on their investments. For self-employed physicians, such as practice owners, emergency doctors, and locum tenens physicians, the solo 401(k) offers an excellent platform to implement this strategy.

It’s essential to consult with a financial advisor and/or tax professional to ensure that the mega backdoor Roth contribution aligns with your financial goals and retirement plan. By taking advantage of this strategy, you can supercharge your retirement savings and secure a more comfortable financial future.