High Earners Are Using This Trick To Save Up To $69K: The Mega Backdoor 401(k)

While some Americans invest in real estate, crypto, or even gambling with hopes of getting rich, contributing to a 401(k) is often considered one of the most reliable ways to get to $401K. Among Americans, retirement savings aren’t always top of mind — but those putting retirement at the top of their budget are wealthier than ever.

According to Fidelity, there are now 485K 401(k) millionaires — with the average retirement account balances hitting their highest levels since 2021. These balances could balloon even faster as more workers unlock super-sized savings through their workplace 401(k) plans.

Saving sacrifice: Vanguard reports that last year, only 15% of 401(k) savers reached the employee contribution cap. However, 58% of workers earning over $150K maxed out their contributions — and employers have taken note. A growing number of large employers are offering “mega-backdoor” 401(k)s, allowing employees to save beyond the standard limit.

• More than half of Fortune 500 companies offer the mega 401(k) — and providers like Fidelity and Vanguard report that 90% and 40% of their plan participants are eligible for after-tax contributions.
• With the mega-backdoor Roth IRA, employees can contribute up to the $69K limit in their 401(k) each year, effectively doubling their max contribution through after-tax contributions.

Chasing Contributions

If you count yourself among the lucky few who can afford to save as much as the average American household earns, you might also work for an employer that supports the mega 401(k). Financial planners generally advise maxing out your Traditional or Roth employee contributions first, which are $23K this year or $30.5K for workers over 50.

• Once you reach the employee max, you can toggle your contributions to after-tax, which will treat your contributions similarly to Roth deposits, but just in a separate account.
• Then, you can roll over after-tax contributions into a Roth IRA at a brokerage, which can grow tax-free until retirement.

Money glitch: While most brokerages allow you to roll over after-tax contributions to a Roth IRA for free, you could potentially earn more by doing a second rollover to a brokerage like Robinhood, SoFi, or WeBull, where you might collect a 1% bonus and enjoy a more user-friendly interface.

The Alternative to the Mega 401(k)

If your employer doesn’t offer the mega 401(k), your options might be limited — you could either find a new job or create one. Many Americans find the latter to be the best option. Today, over 10% of US workers are self-employed, contractors, or gig workers — and for them, setting up a solo 401(k) plan might be the best way to access mega 401(k) features with additional benefits.

• Self-employed workers can make employee, employer, and after-tax contributions on certain platforms to maximize tax savings — at least up to the employee or total contribution limits.
• Workers with a second job could open a second 401(k) to make after-tax contributions above the limits at their primary job.

The wrap-up: Most Americans may only dream of putting $69K into a retirement account, but for those who can, a little sacrifice in the budget could really beef up their retirement outlook. Before undertaking any dramatic changes in portfolio strategy, consult a financial advisor or tax planner for more information. Your future self will thank you.