The Evolution of the “Super Saver” Strategy

In an ever-improving retirement plan industry, guided by both regulatory and recordkeeper evolution, plan participants are now able to contribute up to $69,000 in a 401(k) or 403(b) plan within a calendar year. For those who would benefit from saving more than the commonly referred to $23,000 “maximum,” this solution, also known as the "Mega Backdoor Roth", could be tremendously beneficial. ^[1]

You may have seen articles in the past explaining a method whereby a participant, who was looking to save beyond the then $23,000 limit, could take advantage of a process where they would contribute after-tax dollars to their 401(k) or 403(b) account, then remove those dollars from the plan and convert them from after-tax to Roth within an Individual Retirement Account (IRA).

In recent years, the process has become significantly more efficient because many recordkeepers are now able to convert the after-tax dollars to Roth within the plan. Furthermore, some recordkeepers can convert those dollars the day after the contribution is made, reducing the exposure to taxable investment earnings while in after-tax status. The improvements to recordkeeping capabilities have removed many of the prior complications that discouraged Plan Sponsors and participants from taking advantage of this potential benefit. In today’s environment, depending on the recordkeeper being utilized, many Plan Sponsors may benefit from revisiting this process to determine if it would benefit their participants.

The Process

• A participant contributes $ 23,000 as a Roth (or pre-tax if that is what they prefer) 401(k)/403(b) contribution.

• Assuming there is no employer match or profit sharing, the participant contributes an additional $ 46,000 of after-tax dollars. Employer contributions would reduce the amount of after-tax dollars that could be contributed.
  • Example: If the employer match or profit sharing is $5,000, the participant could only contribute $41,000 of after-tax dollars. The total contribution cannot exceed $69,000 in 2024.
  • Caveat: Participants over the age of 50 can contribute an additional $7,500 above the $69,000 total. Starting in 2026, participants making over $145,000 must make the catch-up contribution as a Roth contribution.

• The participant completes required forms for the recordkeeper and converts after-tax dollars to Roth dollars. Some recordkeepers require paperwork after every contribution, whereas others can automate the process after completing paperwork once.

• The participant now has $69,000 (or more, depending on age) of Roth dollars, all deferred within a calendar year.

This may seem appealing to some participants and Plan Sponsors. However, prior to amending the plan document(s), there are some considerations for the Plan Sponsor.

Considerations

• Recordkeeping

Not all recordkeepers can deliver this type of in-plan conversion from a software perspective. For those who can, the process may vary.

• Testing

A spike in contributions by higher-income earners could trigger failures in testing. Projections can be run by most recordkeepers to determine the likelihood of a failure.

• Taxes

With both Roth and after-tax, the participant pays taxes today on the dollars contributed from their paycheck. If the participant was accustomed to pre-tax contributions and had not planned on paying taxes on the Roth dollars, they could be surprised by a sizable tax bill.

• Earnings

Any earnings on the after-tax contributions, prior to the conversion to Roth, are taxable. Therefore, most participants who want to take advantage of this conversion will want to convert the after-tax dollars to Roth as quickly as possible, so the tax implications are minimal.

• Previously offered after-tax money

If after-tax contributions were previously offered within the plan and are being reinstated as part of this process, previous contributions may be converted by the recordkeeper (as opposed to the more recent after-tax contributions), triggering a larger-than-expected tax bill due to the earnings on the “older” monies. Please confirm the tax implications on all after-tax earnings prior to executing the conversion if this is not the first time you are making after-tax contributions.

To reiterate, the reason this strategy may be so impactful is that the “super saver” plan participants may be able to contribute $69,000 ($76,500 for those over 50) in Roth dollars in a single calendar year. Those dollars would grow tax-free and be withdrawn tax-free. For a participant able to save $69,000 per year, the potential impact of compounding over a long-term time horizon would be considerable.

Not sure how this strategy fits into your portfolio? MBE Wealth is here to guide you toward the ideal retirement plan. Contact our team of advisors at MBE Wealth today to learn how we can support your financial goals.

Disclosure

The information provided is for educational and informational purposes only and does not constitute investment advice, and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status, or investment horizon. You should consult your financial advisor, attorney, or tax advisor. For additional information and disclosures, please visit our website at www.mbewealth.com. MBE Wealth Management, LLC is a registered investment advisor.

This content is developed from sources believed to be providing accurate information, and provided by Fiducient Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

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